• President Signs $9 Billion Package of Foreign Tax Reforms to Fund Education and Medicaid

• Illinois Enacts 2010 Sales Tax Holiday for Clothing and School Supplies

• Closing Deadline Extended to Sept. 30 for Eligible Homebuyer Credit Purchases

• Illinois Enacts Small Business Job Creation Tax Credit

• The Hiring Incentives to Restore Employment Act “HIRE Act” was signed into law by the President on March 18, 2010 

• Haiti Relief Donations

• IRS Announces Streamlined and Simplified Notices to Taxpayers

• IRS Announces 2010 Standard Mileage Rates

• Newly extended and liberalized homebuyer tax credit rules

• Do you Barter?
• Five-Year Carryback of NOLs Extended to Include 2009 NOLs and to Apply to Most Businesses
• Inflation Having Little Effect on Tax Rates and Benefits in 2010
• Employee vs. Independent Contractor
  – Ten Tips for Business Owners
• IRS Alerts Public to New Identity Theft Scams
• IRS Reminds Taxpayers to Take Advantage of Recovery Act Benefits
• Seven Tips for Students with a Summer Job 
• American Recovery and Reinvestment Act of 2009
• Pat's 2009 Tax Tips
• IRS Announces 2009 Standard Mileage Rates
• IRS Offers Tips for Year-End Donations
• The Emergency Economic Stabilization Act of 2008
• Tax Provisions in New Housing Act
• Filing Extensions Changing for Some Business Taxpayers

President Signs $9 Billion Package of Foreign Tax Reforms to Fund Education and Medicaid

Following an unusual sequence of events, Congress passed critical legislation to fund education and Medicaid (H.R. 1586). International tax provisions provide the bulk of the revenue offsets needed for the popular measure to fund the jobs of over 100,000 teachers and first responders, as well as help states fund Medicaid shortfalls.

In addition to a requirement to match the foreign tax credit to related income, the legislation:

• Imposes restrictions on foreign tax credits with respect to covered asset acquisitions,
• Provides for the separate application of foreign tax credit limitations to items resourced under international treaties,
• Limits foreign taxes deemed paid with respect to Code Sec. 956 inclusions,
• Provides a new rule involving redemptions by foreign subsidiaries,
• Modifies the affiliation rules for purposes of rules allocating interest expense,
• Modifies the treatment of interest and dividends paid by 80/20 companies,
• Limits the extension of the statute of limitations for failure to provide notice of certain foreign transfers.

The Senate passed the legislation August 5, 2010, in a last minute vote prior to recessing for August. The House, which adjourned the previous week until mid-September, was called back to Washington, D.C. to take the critical vote prior to the start of the school year. The House passed the bill on August 10, 2010, and President Obama signed the legislation into law on the same day.

Illinois Enacts 2010 Sales Tax Holiday for Clothing
and School Supplies

Illinois Governor Pat Quinn signed legislation that creates a sales tax holiday for certain clothing and school supplies from August 6, 2010 through August 15, 2010. During that period, a reduced 1.25% sales and use tax rate will apply to qualifying items.

Reduced rate for clothing and school supplies. The legislation provides that a sales tax holiday will occur from August 6, 2010 through August 15, 2010. During that period, a reduced sales and use tax rate of 1.25% will apply to: (1) clothing items that each have a retail selling price of less than $100; and (2) school supplies.

Clothing: For purposes of the sales tax holiday, unless otherwise specified, “clothing” means all human wearing apparel suitable for general use. “Clothing” includes, but is not limited to: household and shop aprons; athletic supporters; bathing suits and caps; belts and suspenders; boots; coats and jackets; ear muffs; footlets; gloves and mittens for general use; hats and caps; hosiery; insoles for shoes; lab coats; neckties; overshoes; pantyhose; rainwear; rubber pants; sandals; scarves; shoes and shoelaces; slippers; sneakers; socks and stockings; steel-toed shoes; underwear; and school uniforms.

The definition of “clothing” does not include clothing accessories, protective equipment, or sport or recreational equipment. “Clothing accessories” means, but is not limited to: briefcases; cosmetics; hair notions, including, but not limited to barrettes, hair bows, and hair nets; handbags; handkerchiefs; jewelry; non-prescription sunglasses; umbrellas; wallets; watches; and wigs and hair pieces. “Protective equipment” means, but is not limited to: breathing masks; clean room apparel and equipment; ear and hearing protectors; face shields; hard hats; helmets; paint or dust respirators; protective gloves; safety glasses and goggles; safety belts; tool belts; and welder's gloves and masks. “Sport or recreational equipment” means, but is not limited to: ballet and tap shoes; cleated or spiked athletic shoes; gloves, including, but not limited to, baseball, bowling, boxing, hockey, and golf gloves; goggles; hand and elbow guards; life preservers and vests; mouth guards; roller and ice skates; shin guards; shoulder pads; ski boots; waders; and wetsuits and fins.

School supplies: “School supplies,” unless otherwise specified, means items used by a student in a course of study. The purchase of school supplies for use by persons other than students for use in a course of study are not eligible for the reduced rate of tax. “School supplies” includes, but is not limited to: binders; book bags; calculators; cellophane tape; blackboard chalk; compasses; composition books; crayons; erasers; expandable, pocket, plastic, and manila folders; glue, paste, and paste sticks; highlighters; index cards; index card boxes; legal pads; lunch boxes; markers; notebooks; paper, including loose leaf ruled notebook paper, copy paper, graph paper, tracing paper, manila paper, colored paper, poster board, and construction paper; pencils; pencil leads; pens; ink and ink refills for pens; pencil boxes and other school supply boxes; pencil sharpeners; protractors; rulers; scissors; and writing tablets.

The term “school supplies” does not include school art supplies; school instructional materials; cameras; film and memory cards; videocameras, tapes, and videotapes; computers; cell phones; Personal Digital Assistants (PDAs); handheld electronic schedulers; and school computer supplies. “School art supply” means an item commonly used by a student in a course of study for artwork and includes only the following items: clay and glazes; acrylic, tempera, and oil paint; paintbrushes for artwork; sketch and drawing pads; and watercolors. “School instructional material” means written material commonly used by a student in a course of study as a reference and to learn the subject being taught and includes only the following items: reference books; reference maps and globes; textbooks; and workbooks. “School computer supply” means an item commonly used by a student in a course of study in which a computer is used and applies only to the following items: flashdrives and other computer data storage devices; data storage media, such as diskettes and compact disks; boxes and cases for disk storage; external ports or drives; computer cases; computer cables; computer printers; and printer cartridges, toner, and ink.

Bundled sales. Items that qualify for the reduced rate of tax that are bundled together with items that do not qualify for the reduced rate of tax and that are sold for one itemized price will be subject to the reduced rate of tax only if the value of the items that qualify for the reduced rate of tax exceeds the value of the items that do not qualify for the reduced rate of tax.

Coupons and discounts. An unreimbursed discount by the seller reduces the sales price of the property so that the discounted sales price determines whether the sales price is within a sales tax holiday price threshold. A coupon or other reduction in the sales price is treated as a discount if the seller is not reimbursed for the coupon or reduction amount by a third party.

Splitting of items normally sold together. Articles that are normally sold as a single unit cannot be priced separately and sold as individual items in order to obtain the reduced rate of tax. For example, a pair of shoes cannot have each shoe sold separately so that the sales price of each shoe is within a sales tax holiday price threshold.

Rain checks. A rain check is a procedure that allows a customer to purchase an item at a certain price at a later time because the particular item was out of stock. Eligible property that customers purchase during the sales tax holiday period with the use of a rain check will qualify for the reduced rate of tax regardless of when the rain check was issued. The issuance of a rain check during the sales tax holiday period will not qualify eligible property for the reduced rate of tax if the property is actually purchased after the sales tax holiday period.

Exchanges. If a customer purchases an item of eligible property during the sales tax holiday period, but later exchanges the item for a similar eligible item, even if a different size, different color, or other feature, no additional tax is due even if the exchange is made after the sales tax holiday period. If a customer purchases an item of eligible property during the sales tax holiday period, but after the sales tax holiday period has ended, the customer returns the item and receives credit on the purchase of a different item, the 6.25% general merchandise sales tax rate is due on the sale of the newly purchased item. If a customer purchases an item of eligible property before the sales tax holiday period, but during the sales tax holiday period the customer returns the item and receives credit on the purchase of a different item of eligible property, the reduced rate of tax is due on the sale of the new item if the new item is purchased during the sales tax holiday period.

Delivery charges. Delivery charges, including shipping, handling and service charges, are part of the sales price of eligible property.

Order date and back orders. For the purpose of a sales tax holiday, eligible property qualifies for the reduced rate of tax if: (1) the item is both delivered to and paid for by the customer during the sales tax holiday period; or (2) the customer orders and pays for the item and the seller accepts the order during the sales tax holiday period for immediate shipment, even if delivery is made after the sales tax holiday period. The seller accepts an order when the seller has taken action to fill the order for immediate shipment. Actions to fill an order include placement of an “in date” stamp on an order or assignment of an “order number” to an order within the sales tax holiday period. An order is for immediate shipment when the customer does not request delayed shipment. An order is for immediate shipment notwithstanding that the shipment may be delayed because of a backlog of orders or because stock is currently unavailable to, or on back order by, the seller.

Returns. For a 60-day period immediately after the sales tax holiday period, if a customer returns an item that would qualify for the reduced rate of tax, credit for or refund of sales tax shall be given only at the reduced rate unless the customer provides a receipt or invoice that shows tax was paid at the 6.25% general merchandise rate, or the seller has sufficient documentation to show that tax was paid at the 6.25% general merchandise rate on the specific item. This 60-day period is set solely for the purpose of designating a time period during which the customer must provide documentation that shows that the appropriate sales tax rate was paid on returned merchandise. The 60-day period is not intended to change a seller's policy on the time period during which the seller will accept returns.

Closing Deadline Extended to Sept. 30 for Eligible Homebuyer Credit Purchases  

Eligible taxpayers who contracted to buy a home, qualifying for the first-time homebuyer credit, before the end of April now have until September 30, 2010 to close the deal, according to the Internal Revenue Service. 

The Homebuyer Assistance and Improvement Act of 2010, signed by the President today, extended the closing deadline from June 30 to September 30 for any eligible homebuyer who entered into a binding purchase contract on or before April 30 to close on the purchase of the home on or before June 30, 2010. The new law addresses concerns that many homebuyers might be unable to meet the original June 30 closing deadline. 

The IRS reminds taxpayers that special filing and documentation requirements apply to anyone claiming the homebuyer credit. To avoid refund delays, those who entered into a purchase contract on or before April 30, but closed after that date, should attach to their return a copy of the pages from the signed contract showing all parties' names and signatures if required by local law, the property address, the purchase price, and the date of the contract. 

Besides filling out Form 5405, First-Time Homebuyer Credit and Repayment of the Credit, all eligible homebuyers must also include with their return one of the following documents:

• A copy of the settlement statement showing all parties' names and signatures if required by local law, property address, sales price, and date of purchase. Normally, this is the properly executed Form HUD-1, Settlement Statement.
• For mobile home purchasers who are unable to get a settlement statement, a copy of the executed retail sales contract showing all parties' names and signatures, property address, purchase price and date of purchase.
• For a newly constructed home where a settlement statement is not available, a copy of the certificate of occupancy showing the owner’s name, property address and date of the certificate.

Besides providing a tax benefit to first-time homebuyers and purchasers who have not owned homes in recent years, the law allows a long-time resident of the same main home to claim the credit if they purchase a new principal residence. To qualify, eligible taxpayers must show that they lived in their old homes for a five-consecutive-year period during the eight-year period ending on the purchase date of the new home. Homebuyers claiming this credit can avoid refund delays by attaching documentation covering the five-consecutive-year period:

• Form 1098, Mortgage Interest Statement, or substitute mortgage interest statements,
• Property tax records or
• Homeowner’s insurance records.

There are three options for claiming the credit on a qualifying 2010 purchase:

• If a 2009 return has not yet been filed, claim it on Form 1040 for tax-year 2009. These returns cannot be filed electronically - the returns must be printed out and sent to the IRS, along with all required documentation. The IRS urges taxpayers claiming refunds to choose direct deposit.
• If a 2009 return has already been filed, claim it on an amended return using Form 1040X.
• Whether or not a 2009 return has been filed, wait until next year and claim it on a 2010 Form 1040.

Illinois Enacts Small Business Job Creation Tax Credit

Illinois Governor Pat Quinn signed legislation that allows eligible taxpayers to claim a small business job creation tax credit against withholding tax payments.

Credit allowed. The legislation makes small businesses eligible for a credit against payment of taxes withheld of up to $2,500 for each full-time employee hired during the incentive period (July 1, 2010 through June 30, 2011) that results in a net increase in full-time Illinois employees, where the net increase in the employer's full-time Illinois employees is maintained for at least 12 months.

The credit must be claimed for the first calendar year ending on or after the date on which the Department of Commerce and Economic Opportunity issued the tax credit certificate.

Applicants. A credit applicant must operate a business located within Illinois that is engaged in interstate or intrastate commerce and has no more than 50 full-time employees, without regard to the location of employment of such employees at the beginning of the incentive period.

Net increase in full-time employees. The net increase in full-time Illinois employees, measured on an annual full-time equivalent basis, is the total number of full-time Illinois employees of the applicant on June 30, 2011, minus the number of full-time Illinois employees employed by the employer on July 1, 2010. For purposes of the calculation, an employer that begins doing business in Illinois during the incentive period will be treated as having zero Illinois employees on July 1, 2010.

The net increase in the number of full-time Illinois employees of the applicant must be sustained continuously for at least 12 months, starting with the date of hire of a new employee during the incentive period. Eligibility for the credit does not depend on the continuous employment of any particular individual. If a new employee ceases to be employed before the completion of the 12-month period for any reason, the net increase in the number of full-time Illinois employees will be treated as continuous if a different new employee is hired as a replacement within a reasonable time for the same position.

Excess credit may be carried forward. The credit may not reduce the taxpayer's obligation for withholding tax payments due to less than zero. If the amount of the credit exceeds the total payments due with respect to amounts withheld during the calendar year, the excess may be carried forward and applied against the taxpayer's liability in the five succeeding calendar years. The credit must be applied to the earliest year for which there is a tax liability. If there are credits from more than one calendar year that are available to offset a liability, the earlier credit must be applied first.

Maximum amount of credits awarded. The monetary amount of credits awarded pursuant to this legislation is limited to no more than $50 million. If applications for a greater amount are received, credits will be allowed on a first-come-first-served basis, based on the date on which each properly completed application for a certificate of eligibility is received by the Department.

Certificates of eligibility. An applicant that has hired a new employee during the incentive period may apply for a certificate of eligibility for the credit with respect to that position on or after the date of hire of the new employee. The date of hire will be the first day on which the employee begins providing services for basic wage compensation. An applicant may apply for a certificate of eligibility for the credit for more than one new employee on or after the date of hire of each qualifying new employee.

After receipt of an application, the Department will issue a certificate of eligibility to the applicant.

Applications for credit. On or after the conclusion of the 12-month period after a new employee has been hired, an applicant must file with the Department an application for award of a credit.

Although an application may be filed at any time after the conclusion of the 12-month period after a new employee was hired, an application filed more than 90 days after the earliest date on which it could have been filed will not be awarded any credit if, prior to the date it is filed, the Department has received applications for credits totaling more than $50 million.

Issuance of tax credit certificates. The Department will issue a certificate to each applicant awarded a credit. The certificate must include the following: (1) the name and taxpayer identification number of the applicant; (2) the date on which the certificate is issued; (3) the credit amount that will be allowed; and (4) any other information the Department determines to be appropriate.

Submission of tax credit certificates to Department of Revenue. An applicant claiming a credit must submit to the Department of Revenue a copy of each certificate issued with the first return for which the credit shown on the certificate is claimed. However, failure to submit a copy of the certificate with the applicant's return will not invalidate a claim for a credit.

Noncompliance. If the Director of the Department of Commerce and Economic Opportunity determines that a credit recipient is not complying with the requirements, the Director will provide notice to the applicant of the alleged noncompliance, and allow the taxpayer a hearing under the provisions of the Illinois Administrative Procedure Act. If, after notice and hearing, the Director determines that noncompliance exists, the Director will notify the Department of Revenue.

The Hiring Incentives to Restore Employment Act “HIRE Act” was signed into law by the President on March 18, 2010 
 

Payroll Tax Holiday in 2010 for Hiring Unemployed Workers

The Act provides relief from the employer share of OASDI taxes for employers that hire unemployed workers. The relief applies to wages paid beginning on Mar. 19, 2010 (the day after the enactment date) and ending on Dec. 31, 2010.

The payroll tax holiday applies only to the 6.2% OASDI portion of the employer's tax. It does not apply to the 1.45% Medicare portion of the employer's tax, nor to any part of the employee's tax. It also does not affect the self-employment tax paid by self-employed individuals.  The amount of tax forgiven per employee cannot exceed $6,621.60, because the OASDI tax applies to only the first $106,800 of wages paid in 2010 ($106,800 × 6.2% = $6,621.60).  An employee need not work for a minimum number of hours in order for the employer to qualify for the payroll tax holiday.

An employer who terminates an employee without cause in order to claim the payroll tax holiday for hiring the same or another employee does not qualify.  There is no payroll tax holiday for hiring a relative such as the qualified employer's child or descendant of a child; a stepchild; sibling, stepbrother, or stepsister; parent or stepparent; niece, nephew, uncle or aunt; or in-laws.

The payroll tax holiday does not apply for wages paid during the first calendar quarter of 2010.  The rule providing that the payroll tax holiday does not apply for wages paid during the first quarter will give IRS time to issue guidance about the payroll tax holiday and will give employers time to adjust their payroll systems accordingly. Employers will not lose out, because the amount of first quarter wages that would have been forgiven will be allowed as a credit for the second quarter.

New Up-to-$1,000 Credit for Each “Retained Worker”

For any tax year ending after Mar. 18, 2010, the Act provides an up-to-$1,000 credit for “retained workers.”

A retained worker is defined as any qualified individual, as defined for purposes of the payroll tax holiday:

(1) who was employed by the taxpayer on any date during the tax year,

(2) who was so employed by the taxpayer for a period of not less than 52 consecutive weeks, and

(3) whose wages for that employment during the last 26 weeks of the period (described in item (2) above) equaled at least 80% of the wages for the first 26 weeks of that period.

An employer will need to keep careful records with respect to each employee hired after Feb. 3, 2010 and before Jan. 1, 2011 so that it can prove that each employee for which it claims the up-to-$1,000 increase to the current year business credit meets the definition of a retained worker.

Expensing Limits Boosted For 2010

Generally, taxpayers can elect to treat the cost of any Code Section 179 property placed in service during the tax year as an expense which is not chargeable to capital account, and any cost so treated is allowed as a deduction for the tax year in which the section 179 property is placed in service.

For tax years beginning after 2007 and before 2011, the Act provides that:

... the dollar limitation on the Code Section 179 expensing deduction is $250,000,

... the reduction in the dollar limitation (beginning-of-phaseout amount) starts to take effect when property placed in service in a tax year exceeds $800,000, and

... neither the dollar limitation nor the beginning-of-phaseout amount is adjusted for inflation.

Additionally, the increase in dollar limitation amounts and no-inflation-adjustment rule for 2008 and 2009 are removed.

Thus, the Act increases for one year (2010) the amount a taxpayer can expense under Code Section 179.

A new law went into effect on January 22, 2010, allowing taxpayers to make charitable contributions to organizations providing relief to victims in areas affected by the January 12 earthquake in Haiti. Taxpayers have the option of deducting these contributions on either their 2009 or 2010 returns, but not both. The new law only applies to cash (as opposed to property) contributions. This includes contributions made by text message, check, credit card, or debit card. Contributions must be made to qualified charitable organizations after January 11, 2010, and before March 1, 2010, to qualify.

To get a tax benefit, taxpayers must itemize their deductions on Schedule A. Those who claim the standard deduction, including all short-form filers, are not eligible.

In addition, Haiti has been declared a qualified disaster for federal tax purposes.  Recipients of qualified disaster relief payments are allowed to exclude those payments from income tax. 

IRS Announces Streamlined and Simplified Notices to Taxpayers

The Internal Revenue Service today unveiled its first redesigned notices that are part of an on-going effort to improve the way it corresponds with taxpayers.

The nine new notices are among the first to be reviewed and revised for clarity, effectiveness and efficiency. The agency also will create an office that ensures the effort to improve communications is on-going and permanent.

“One of my priorities is to ensure that we have clear and simple communication with taxpayers. In the past, our notices often looked more like legal documents and not an effort to communicate clearly. The differences between the old and new notices are like night and day. They show the potential of our on-going effort in this area,” said IRS Commissioner Doug Shulman.

In July 2008, Shulman appointed the Taxpayer Communications Taskgroup to review IRS correspondence. The task group found that IRS notices have different looks, messages and do not use consistent language. Because of this, some notices are creating unnecessary confusion for taxpayers.

Nine notices will feature the new design format beginning in January. These notices account for approximately 2 million pieces of correspondence with individuals, businesses and exempt organizations. A revised web page is available at www.irs.gov/notices.

The new format includes a plain language explanation of the nature of the correspondence, clearly states what action the taxpayer must take and presents a consistent, clean design. The new format also guides taxpayers to appropriate pages on IRS.gov where they can find accurate and relevant information quickly and easily.

By reducing the potential for confusion, these notices will improve the taxpayers’ ability to get problems resolved quickly, and improve overall compliance.

IRS Announces 2010 Standard Mileage Rates

The Internal Revenue Service today issued the 2010 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning on January 1, 2010, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

• 50 cents per mile for business miles driven
• 16.5 cents per mile driven for medical or moving purposes
• 14 cents per mile driven in service of charitable organizations

The new rates for business, medical and moving purposes are slightly lower than last year’s. The mileage rates for 2010 reflect generally lower transportation costs compared to a year ago.

Newly extended and liberalized homebuyer tax credit rules
On November 6, the President signed into law H.R. 3548, the ''Worker, Homeownership, and Business Assistance Act of 2009.'' The new law extends and generally liberalizes the tax credit for first-time homebuyers, making it a much more flexible tax-saving tool. It also includes some crackdowns designed to prevent abuse of the credit. These important changes could it make it easier for you or someone in your family to buy a home. And because the changes generally aid buyers and aim to improve residential real estate markets nationwide, they also could make it easier for you or someone in your family to sell a home.

Homebuyer credit basics. Before the new law was enacted, the homebuyer credit was only available for qualifying first-time home purchases after April 8, 2008, and before December 1, 2009. The top credit for homes bought in 2009 is $8,000 ($4,000 for a married individual filing separately) or 10% of the residence's purchase price, whichever is less. Only the purchase of a main home located in the U.S. qualifies. Vacation homes and rental properties are not eligible. The homebuyer credit reduces one's tax liability on a dollar-for-dollar basis, and if the credit is more than the tax you owe, the difference is paid to you as a tax refund. For homes bought after Dec. 31, 2008, the homebuyer credit is recaptured (i.e., paid back to the IRS) if a person disposes of the home (or stops using it as a principal residence) within 36 months from the date of purchase.

Before the new law, the first-time homebuyer credit phased out for individual taxpayers with modified adjusted gross income (AGI) between $75,000 and $95,000 ($150,000 and $170,000 for joint filers) for the year of purchase.

Your guide to the revised homebuyer credit. The new law makes four important changes to the homebuyer credit:

(1) New lease on life for the homebuyer credit. The homebuyer credit is extended to apply to a principal residence bought before May 1, 2010. The homebuyer credit also applies to a principal residence bought before July 1, 2010 by a person who enters into a written binding contract before May 1, 2010, to close on the purchase of the principal residence before July 1, 2010. In general, a home is considered bought for credit purposes when the closing takes place. So the extra two-months (May and June of 2010) helps buyers who find a home they like but can't close on it before May 1, 2010. They can go to contract on the home before May 1, 2010, close on it before July 1, 2010, and get the homebuyer credit (if they otherwise qualify). Note that certain service members on qualified official extended duty service outside of the U.S. get an extra year to buy a qualifying home and get the credit; they also can avoid the recapture rules under certain circumstances.

(2) The homebuyer credit may be claimed by existing homeowners who are “long-time residents.” For purchases after November 6, 2009, you can claim the homebuyer credit if you (and, if married, your spouse) maintained the same principal residence for any 5-consecutive year period during the 8-years ending on the date that you buy the subsequent principal residence. For example, if you and your spouse are empty nesters who have lived in your suburban home for the past ten years, you are potentially eligible for the credit if you “move down” and buy a smaller townhome. There's no requirement for your current home to be sold in order to qualify for a homebuyer credit on the replacement principal residence. Thus, the replacement residence can be bought to beat the new deadlines (explained above) before the old home is sold. For that matter, you can hold on to your prior principal residence in the hope of achieving a better selling price later on.

The maximum allowable homebuyer credit for qualifying existing homeowners is $6,500 ($3,250 for a married individual filing separately), or 10% of the purchase price of the subsequent principal residence, whichever is less.

(3) The homebuyer credit is available to higher income taxpayers. For purchases after November 6, 2009, the homebuyer credit phases out over much higher modified AGI levels, making the credit available to a much bigger pool of buyers. For individuals, the phaseout range is between $125,000 and $145,000, and for those filing a joint return, it's between $225,000 and $245,000.

(4) There's a new home-price limit for the homebuyer credit. For purchases after Nov. 6, 2009, the homebuyer credit cannot be claimed for a home if its purchase price exceeds $800,000. It's important to note that there is no phaseout mechanism. A purchase price that exceeds the $800,000 threshold by even a single dollar will cause the loss of the entire credit.

The new purchase price limitation applies whether you are buying a first-time principal residence or are a qualifying existing homeowner purchasing a replacement principal residence.

Other homebuyer credit changes. The new law includes a number of new anti-abuse rules to prevent taxpayers from claiming the homebuyer credit even though they don't qualify for it. The most important of these are as follows:

... Beginning with the 2010 tax return, the homebuyer credit can't be claimed unless the taxpayer attaches to the return a properly executed copy of the settlement statement used to complete the purchase of the qualifying residence.

... For purchases after Nov. 6, 2009, the homebuyer credit can't be claimed unless the taxpayer has attained 18 years of age as of the date of purchase (a married person is treated as meeting the age requirement if he or his spouse meets the age requirement).

... For purchases after Nov. 6, 2009, the homebuyer credit can't be claimed by a taxpayer if he can be claimed as a dependent by another taxpayer for the tax year of purchase. It also can't be claimed for a home bought from a person related to the buyer or the spouse of the buyer, if married.

... Beginning with 2009 returns, the new law makes it easier for the IRS to go after questionable homebuyer credit claims without initiating a full-scale audit.

What hasn't changed. The tax law still gives you the extraordinary opportunity to get your hands on homebuyer credit cash without waiting to file your tax return for the year in which you buy the qualifying principal residence. Thus, if you buy a qualifying principal residence in 2009 you can treat the purchase as having taken place this past December 31, file an amended return for 2008 claiming the credit for that year, and get your homebuyer credit cash relatively quickly via a tax refund. Similarly, you can treat a qualifying principal residence bought in 2010 (before the new deadlines) as having taken place on December 31, 2009, and file an original or amended return for 2009 claiming the credit for that year.

Do You Barter?
Bartering is the trading of one product or service for another. Usually there is no exchange of cash. Barter may take place on an informal one-on-one basis between individuals and businesses, or it can take place on a third party basis through a modern barter exchange company.

Bartering is the most ancient form of commerce. While our ancestors may have exchanged eggs for corn, today you can barter computer services for auto repair.

Another example of a one-on-one, non-barter exchange transaction is a plumber doing repair work for a dentist in exchange for dental services. The fair market value of the goods and services exchanged must be reported as income by both parties.

Here are a few things you should know about bartering:

• Barter Exchange A barter exchange functions primarily as the organizer of a marketplace where members buy and sell products and services among themselves. Whether this activity operates out of a physical office or is internet based, a barter exchange is generally required to issue Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, annually to their clients or members and to the IRS.
 
• Barter Income Barter dollars or trade dollars are identical to real dollars for tax reporting. If you conduct any direct barter - barter for another’s products or services - you will have to report the fair market value of the products or services you received on your tax return.

• Taxes Income from bartering is taxable in the year it is performed. You may be subject to liabilities for income tax, self-employment tax, employment tax, or excise tax. Your barter activities may result in ordinary business income, capital gains or capital losses, or you may have a nondeductible personal loss.

Five-Year Carryback of NOLs Extended to Include 2009 NOLs and to Apply to Most Businesses
New law. The Act provides an election for most taxpayers (not just small businesses) to increase the carryback period for an applicable NOL to 3, 4, or 5 years from 2 years.

Inflation Having Little Effect on Tax Rates and Benefits in 2010 

Tax rate brackets and various tax benefits will remain unchanged or change only slightly in 2010 due to inflation, the Internal Revenue Service announced today.

By law, the dollar amounts for a variety of tax provisions must be revised each year to keep pace with inflation. As a result, more than three dozen tax benefits are subject to inflation adjustments each year, but because recent inflation factors have been minimal, many of these benefits will remain unchanged or change only slightly for 2010.

Key provisions affecting 2010 returns, filed by most taxpayers in early 2011, include the following:

• The value of each personal and dependency exemption available to most taxpayers is $3,650, unchanged from 2009.
• The new standard deduction for heads of household is $8,400, up from $8,350 in 2009. For other taxpayers, the standard deduction remains unchanged at $11,400 for married couples filing a joint return and $5,700 for singles and married individuals filing separately. Nearly two out of three taxpayers take the standard deduction rather than itemizing deductions, such as mortgage interest, charitable contributions, and state and local taxes.
• Various tax bracket thresholds will see minor adjustments. For example, for a married couple filing a joint return the taxable income threshold separating the 15 percent bracket from the 25 percent bracket is $68,000, up from $67,900 in 2009.
• The annual gift tax exclusion remains unchanged at $13,000.
   

Employee vs. Independent Contractor
– Ten Tips for Business Owners

IRS Alerts Public to New Identity Theft Scams

The Internal Revenue Service reminds consumers to avoid identity theft scams that use the IRS name, logo or Web site in an attempt to convince taxpayers that the scam is a genuine communication from the IRS. Scammers may use other federal agency names, such as the U.S. Department of the Treasury.

In an identity theft scam, a fraudster, often posing as a trusted government, financial or business institution or official, tries to trick a victim into revealing personal and financial information, such as credit card numbers and passwords, bank account numbers and passwords, Social Security numbers and more. Generally, identity thieves use someone’s personal data to steal his or her financial accounts, run up charges on the victim’s existing credit cards, apply for new loans, credit cards, services or benefits in the victim’s name and even file fraudulent tax returns.

The IRS does not discuss tax account matters with taxpayers by e-mail.

The IRS urges consumers to avoid falling for the following recent schemes:

Making Work Pay Refund

This phishing e-mail, which claims to come from the IRS, references the president and the Making Work Pay provision of the 2009 economic recovery law. It says that there is a refundable credit available to workers, consumers and retirees that can be paid into the recipient’s bank account if the recipient registers their account information with the IRS. The e-mail contains links to register the account and to claim the tax refund.

In reality, most taxpayers receive their Making Work Pay tax credit, which was designed for wage earners, in their paychecks as a result of decreased tax withholding, not as a lump sum distribution from a federal fund. Additionally, consumers and retirees who are not wage earners are not eligible for this tax credit.

Inherited Funds / Lottery Winnings / Cash Consignment

In this phishing scheme, recipients receive an e-mail claiming to come from the U.S. Department of the Treasury notifying them that they will receive millions of dollars in recovered funds or lottery winnings or cash consignment if they provide certain personal information, including phone numbers, via return e-mail. The e-mail may be just the first step in a multi-step scheme, in which the victim is later contacted by telephone or further e-mail and instructed to deposit taxes on the funds or winnings before they can receive any of it. Alternatively, they may be sent a phony check of the funds or winnings and told to deposit it but pay 10 percent in taxes or fees. Thinking that the check must have cleared the bank and is genuine, some people comply. However, the scammers, not the Treasury Department, will get the taxes or fees.

Form W-8BEN

In this scam, fraudsters modify a genuine IRS form, the W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding, to request detailed personal and financial information. This could include nationality, passport number, bank account and PIN numbers, spouse’s name and mother’s maiden name, or other personal or financial information or security measures for financial accounts. The scammers may use the genuine form number and name or may make up a new form number, such as W-4100B2.

They either e-mail or fax the form or letter. If only a letter, the letter itself contains the request for the personal and financial information. The letter, which claims to come from the IRS, states that the recipient will face additional taxes unless he or she quickly faxes the required information to the number provided by the scammer.

In reality, taxpayers file the genuine Form W-8BEN with their financial institutions, not with the IRS. Additionally, the genuine W-8BEN does not request the taxpayer’s passport number, bank account number, security or similar information.

Refund Scam

The bogus e-mail, which claims to come from the IRS, tells the recipient that he or she is eligible to receive a tax refund for a given amount. It instructs the recipient to click on a link contained in the e-mail to access and complete a form for the tax refund. The form requires the entry of personal and financial information. The refund scam is the most common one seen by the IRS. Several recent variations on this scam have claimed to come from the Exempt Organizations area of the IRS. Some others have included the name and purported signature of a genuine or a made-up IRS executive.

Taxpayers do not have to complete a special form to obtain a refund. Taxpayer refunds are based on the tax return they submit to the IRS.   

How to Spot a Scam

Many e-mail scams are fairly sophisticated and hard to detect. However, there are signs to watch for, such as an e-mail that:

• Requests detailed or an unusual amount of personal and/or financial information, such as name, SSN, bank or credit card account numbers or security-related information, such as mother’s maiden name, either in the e-mail itself or on another site to which a link in the e-mail sends the recipient.
• Dangles bait to get the recipient to respond to the e-mail, such as mentioning a tax refund or offering to pay the recipient to participate in an IRS survey.
• Threatens a consequence for not responding to the e-mail, such as additional taxes or blocking access to the recipient’s funds.
• Gets the Internal Revenue Service or other federal agency names wrong.
• Uses incorrect grammar or odd phrasing (many of the e-mail scams originate overseas and are written by non-native English speakers).
• Uses a really long address in any link contained in the e-mail message or one that does not start with the actual IRS Web site address (www.irs.gov). To see the actual link address, or url, move the mouse over the link included in the text of the e-mail.

What to Do

The IRS does not initiate taxpayer contact via unsolicited e-mail or ask for personal identifying or financial information via e-mail. If you receive a suspicious e-mail claiming to come from the IRS, take the following steps:

• Do not open any attachments to the e-mail, in case they contain malicious code that will infect your computer.
• Do not click on any links, for the same reason. Also, be aware that the links often connect to a phony IRS Web site that appears authentic and then prompts the victim for personal identifiers, bank or credit card account numbers or PINs. The phony Web sites appear legitimate because the appearance and much of the content are directly copied from an actual page on the IRS Web site and then modified by the scammers for their own purposes.
• Contact the IRS at 1-800-829-1040 to determine whether the IRS is trying to contact you.
• Forward the suspicious e-mail or url address to the IRS mailbox phishing@irs.gov, then delete the e-mail from your inbox.

Genuine IRS Web site

The only genuine IRS Web site is IRS.gov. All IRS.gov Web page addresses begin with http://www.irs.gov/. Anyone wishing to access the IRS Web site should initiate contact by typing the IRS.gov address into their Internet address window, rather than clicking on a link in an e-mail.

IRS Reminds Taxpayers to Take Advantage of Recovery Act Benefits

With 2009 now half over, the Internal Revenue Service reminds taxpayers to take advantage of the numerous tax breaks made available earlier this year in the American Recovery and Reinvestment Act (ARRA).

The recovery law provides tax incentives for first-time homebuyers, people purchasing new cars, those interested in making their homes more energy efficient and parents and students paying for college. But all of these incentives have expiration dates so taxpayers should take advantage of them while they can.

First-Time Homebuyer Credit

The Recovery Act extended and expanded the first-time homebuyer tax credit for 2009.

Taxpayers who didn’t own a principal residence during the past three years and  purchase a home this year before Dec. 1 can receive a credit of up to $8,000 on either an original or amended 2008 tax return, or a 2009 return. But the purchase must close before Dec. 1, 2009, and an eligible taxpayer cannot claim the credit until after the closing date. This credit phases out at higher income levels, and different rules apply to home purchases made in 2008.

New Vehicle Purchase Incentive
ARRA also provides a tax break to taxpayers who make qualified new vehicle purchases after Feb. 16, 2009, and before Jan. 1, 2010.

Qualifying taxpayers can deduct the state and local sales and excise taxes paid on the purchase of new cars, light trucks, motor homes and motorcycles. There is no limit on the number of vehicles that may be purchased, and you may claim the deduction for taxes paid on multiple purchases. But the deduction per vehicle is limited to the tax on up to $49,500 of the purchase price of each qualifying vehicle and phases out for taxpayers at higher income levels. This deduction is available regardless of whether a taxpayer itemizes deductions on Schedule A.

Energy-Efficient Home Improvements
The Recovery Act also encourages homeowners to make their homes more energy efficient. The credit for nonbusiness energy property is increased for homeowners who make qualified energy-efficient improvements to existing homes. The law increases the rate to 30 percent of the cost of all qualifying improvements and raises the maximum credit limit to a total of $1,500 for improvements placed in service in 2009 and 2010.

Qualifying improvements include the addition of insulation, energy-efficient exterior windows and energy-efficient heating and air conditioning systems.

Tax Credit for First Four Years of College 
The American opportunity credit is designed to help parents and students pay part of the cost of the first four years of college. The new credit modifies the existing Hope credit for tax years 2009 and 2010, making it available to a broader range of taxpayers, including many with higher incomes and those who owe no tax. Tuition, related fees, books and other required course materials generally qualify. Many of those eligible will qualify for the maximum annual credit of $2,500 per student.

Certain Computer Technology Purchases Allowed for 529 Plans
ARRA adds computer technology to the list of college expenses (tuition, books, etc.) that can be paid for by a qualified tuition program (QTP), commonly referred to as a 529 plan. For 2009 and 2010, the law expands the definition of qualified higher education expenses to include expenses for computer technology and equipment or Internet access and related services to be used by the designated beneficiary of the QTP while enrolled at an eligible educational institution. Software designed for sports, games or hobbies does not qualify, unless it is predominantly educational in nature.

Making Work Pay and Withholding
The Making Work Pay Credit lowered tax withholding rates this year for 120 million American households. However, particular taxpayers who fall into any of the following groups should review their tax withholding rates to ensure enough tax is withheld, including multiple job holders, families in which both spouses work, workers who can be claimed as dependents by other taxpayers and pensioners. Failure to adjust your withholding could result in potentially smaller refunds or in limited instances may cause you to owe tax rather than receive a refund next year. So far in 2009, the average refund amount is $2,675, and 79 percent of all returns received a refund.

Seven Tips for Students with a Summer Job 

Many students get a summer job during their time off from school. Here are the top seven things the IRS wants everyone to know about income earned while working a summer job.

1. Taxpayers fill out a W-4 when starting a new job. This form is used by employers to determine the amount of tax that will be withheld from your paycheck. Taxpayers with multiple summer jobs will want to make sure all their employers are withholding an adequate amount of taxes to cover their total income tax liability. To make sure your withholding is correct, visit the Withholding Calculator on IRS.gov.

2. Whether you are working as a waiter or a camp counselor, you may receive tips as part of your summer income. All tip income you receive is taxable income and is therefore subject to federal income tax.

3. Many students do odd jobs over the summer to make extra cash. Earnings you received from self-employment are subject to income tax. These earnings include income from odd jobs like baby-sitting and lawn mowing.

4. If you have net earnings of $400 or more from self-employment, you will also have to pay self-employment tax. This tax pays for your benefits under the Social Security system. Social Security and Medicare benefits are available to individuals who are self-employed the same as they are to wage earners who have Social Security tax and Medicare tax withheld from their wages. The self-employment tax is figured on Form 1040, Schedule SE.

5. Subsistence allowances paid to ROTC students participating in advanced training are not taxable. However, active duty pay – such as pay received during summer advanced camp – is taxable.

6. Special rules apply to services you perform as a newspaper carrier or distributor. You are a direct seller and treated as self-employed for federal tax purposes if you meet the following conditions:

• You are in the business of delivering newspapers.
• All your pay for these services directly relates to sales rather than to the number of hours worked.
• You perform the delivery services under a written contract which states that you will not be treated as an employee for federal tax purposes.

7. Generally, newspaper carriers or distributors under age 18 are not subject to self-employment tax.

Beginning on Jan. 1, 2009, the standard mileage rates for the use of a car (also vans, pickups, or panel trucks) will be:

• 55 cents per mile for business miles driven
• 24 cents per mile driven for medical or moving purposes
• 14 cents per mile driven in service of charitable organizations

The new rates for business, medical and moving purposes are slightly lower than rates for the second half of 2008 that were raised by a special adjustment mid-year in response to a spike in gasoline prices. The rate for charitable purposes is set by law and is unchanged from 2008.

The business mileage rate was 50.5 cents in the first half of 2008 and 58.5 cents in the second half. The medical and moving rate was 19 cents in the first half and 27 cents in the second half.

The mileage rates for 2009 reflect generally higher transportation costs compared to a year ago, but the rates also factor in the recent reversal of rising gasoline prices. While gasoline is a significant factor in the mileage rate, other fixed and variable costs, such as depreciation, enter the calculation.

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs as determined by the same study. Independent contractor Runzheimer International conducted the study.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for any vehicle used for hire or for more than four vehicles used simultaneously.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

One provision offers older owners of individual retirement arrangements (IRAs) a different way to give to charity. There are also rules designed to provide both taxpayers and the government greater certainty in determining what may be deducted as a charitable contribution. Some of these changes include the following.

Special Charitable Contributions for Certain IRA Owners

An IRA owner, age 70 ½ or over, can directly transfer tax-free up to $100,000 per year to an eligible charitable organization. This option, created in 2006 and recently extended through 2009, is available to eligible IRA owners, regardless of whether they itemize their deductions. Distributions from employer-sponsored retirement plans, including SIMPLE IRAs and simplified employee pension (SEP) plans, are not eligible.

To qualify, the funds must be contributed directly by the IRA trustee to the eligible charity. Amounts so transferred are not taxable and no deduction is available for the amount given to the charity.

Not all charities are eligible. For example, donor-advised funds and supporting organizations are not eligible recipients.

Transferred amounts are counted in determining whether the owner has met the IRA’s required minimum distribution rules. Where individuals have made nondeductible contributions to their traditional IRAs, a special rule treats transferred amounts as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions. See Publication 590, Individual Retirement Arrangements (IRAs), for more information on qualified charitable distributions.

Rules for Clothing and Household Items

To be deductible, clothing and household items donated to charity must be in good used condition or better. A clothing or household item for which a taxpayer claims a deduction of over $500 does not have to be in good used condition or better if the taxpayer includes a qualified appraisal of the item with the return. Household items include furniture, furnishings, electronics, appliances, and linens.

Guidelines for Monetary Donations

To deduct any charitable donation of money, regardless of amount, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. Bank records include canceled checks, bank or credit union statements, and credit card statements. Bank or credit union statements should show the name of the charity, the date, and the amount paid. Credit card statements should show the name of the charity, the date, and the transaction posting date.

Donations of money include those made in cash or by check, electronic funds transfer, credit card, and payroll deduction. For payroll deductions, the taxpayer should retain a pay stub, a Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.

These requirements for monetary donations do not change or alter the long-standing requirement that a taxpayer obtain an acknowledgment from a charity for each deductible donation (either money or property) of $250 or more. However, one statement containing all of the required information may meet the requirements of both provisions.

To help taxpayers plan their holiday-season and year-end giving, the IRS offers the following additional reminders:

• Contributions are deductible in the year made. Thus, donations charged to a credit card before the end of the year count for 2008. This is true even if the credit card bill isn’t paid until next year. Also, checks count for 2008 as long as they are mailed this year.
• Check that the organization is qualified. Only donations to qualified organizations are tax-deductible. IRS Publication 78, available online and at many public libraries, lists most organizations that are qualified to receive deductible contributions. The searchable online version can be found at IRS.gov under “ Search for Charities.” In addition, churches, synagogues, temples, mosques and government agencies are eligible to receive deductible donations, even though they often are not listed in Publication 78.
• For individuals, only taxpayers who itemize their deductions on Form 1040 Schedule A can claim deductions for charitable contributions. This deduction is not available to people who choose the standard deduction, including anyone who files a short form (Form 1040A or 1040EZ). A taxpayer will have a tax savings only if the total itemized deductions (mortgage interest, charitable contributions, state and local taxes, etc.) exceeds the standard deduction. Use the 2008 Form 1040 Schedule A, available now on IRS.gov, to determine whether itemizing is better than claiming the standard deduction.
• For all donations of property, including clothing and household items, get from the charity, if possible, a receipt that includes the name of the charity, date of the contribution, and a reasonably-detailed description of the donated property. If a donation is left at a charity’s unattended drop site, keep a written record of the donation that includes this information, as well as the fair market value of the property at the time of the donation and the method used to determine that value.Additional rules apply for a contribution of $250 or more.
• The deduction for a motor vehicle, boat or airplane donated to charity is usually limited to the gross proceeds from its sale. This rule applies if the claimed value of the vehicle is more than $500. Form 1098-C, or a similar statement, must be provided to the donor by the organization and attached to the donor’s tax return.
• If the amount of a taxpayer’s deduction for all noncash contributions is over $500, a properly-completed Form 8283 must be submitted with the tax return.

For additional information on charitable giving:

• Visit IRS.gov and click on " Charities and Non-Profits."
• See IRS Publication 526, Charitable Contributions.
• Review the on-line mini-course, Can I Deduct My Charitable Contributions? 

THE EMERGENCY ECONOMIC STABILIZATION ACT OF 2008

The Emergency Economic Stabilization Act of 2008, was signed on October 3rd and contains over $150 billion in tax breaks.

Return Preparer Penalties

The Act lowered the reporting standard under section 6694 to “substantial authority” from “more likely than not” for undisclosed, non-tax shelter positions. This is the same standard that applies to taxpayers. The change is retroactive to the date when the higher standard was enacted, May 25, 2007. This is a great victory for CPAs that the AICPA had been fighting for since Congress raised the standard for preparers to a level higher than for taxpayers, creating potential conflicts of interest between CPAs and their clients.

Brokers’ Statements to Arrive Later Beginning this Filing Season

The Act extends the date by which brokers must furnish information forms to customers. This includes stock broker 1099-B forms and also other forms from brokers, including realtors. Beginning with statements furnished in 2009, brokers will avoid penalties if they furnish these forms on or before February 15 – as opposed to the old due date of January 31. This could further compress the return preparation season for practitioners.

AMT Relief

The law extends AMT relief for nonrefundable personal credits and increases the AMT exemption amounts to $46,200 for singles and heads-of-household, $69,950 for joint filers and surviving spouses and $34,975 for married filing separately through 2008. The law also abates all unpaid AMT liabilities, including penalties and interest, associated with the exercise of incentive stock options before 2008. For those who have already paid AMT-ISO liability, the law accelerates the minimum tax credit associated with AMT items to allow the unused credit to be refunded over two years rather than five.

Individual Extenders

The law extends the following individual tax provisions through 2009:

• the itemized deduction for state and local sales taxes;
• the above-the-line qualified tuition and expenses deduction;
• the limited addition to the standard deduction for real property taxes paid by non-itemizers;
• the provision that allows taxpayers to make tax-free distributions of up to $100,000 per year to qualified charities from their traditional and Roth IRAs;
• a provision allowing regulated investment companies (RICs) to designate some dividends as interest-related dividends;
• the estate tax look-through for RIC stock held by nonresidents,
• the designation of RICs as qualified investment entities under section 897; and
• the above-the-line $250 deduction for teachers' classroom expenses.

Business Extenders

The law extends the following business tax provisions through 2009:

• Research tax credit increased to 14%; alternative incremental credit repealed; and alternative simplified credit increased;
• 15-year cost recovery for leasehold and restaurant improvement;
• Contributions of food and contributions of books and computer hardware to schools is extended, and S corp shareholders can receive pass-through charitable deductions of appreciated property equal to fair market value rather than the S corp basis in the property;
• New markets tax credit for loans to small businesses in distressed areas; and
• FUTA surcharge of .2% (on wage base up to $7,000 per employee).

Energy Tax Provisions

The Act contains a variety of extended and new tax incentives in the energy area, including:

• Credit of up to $500 for residential insulation, storm doors, etc. is extended to cover property placed in service through 2009.
• Deduction under 179 for energy efficient commercial buildings is extended through 2013;
• The credit to encourage production of renewable energy is extended through 2009 and expanded to include additional sources of renewable energy; and
• Solar and fuel cell credits are extended through 2016.

Child Tax Credit

For the 2008 tax year, the refundable threshold for the child tax credits would decrease from $12,050 to $8,500.

Brokers to Report Customer Basis

The Act requires brokers to report the customer’s basis in sold securities beginning in 2011 for stocks, 2012 for mutual funds, and 2013 for other securities. The IRS and some taxpayers have had difficulty determining basis, and in some cases reported cost reflected the FMV on the date the stock was transferred into a brokerage account rather than actual cost.

The AICPA has suggested that brokers provide basis information to taxpayers in a format that would enable taxpayers and tax preparers to download the information directly into their tax return preparation software.

Foreign Deferred Comp

Beginning in 2009, compensation paid by certain foreign corporations or partnerships that is deferred by more than a year will be taxable when vested. This provision reflects a concern that employers in lower-taxing countries have little or no tax cost from delaying the compensation deduction until the income is picked up by the employee.

Exclusion of Mortgage Debt Relief from Income

Home mortgage debt relief of up to $2 million will continue to be excluded from cancellation of indebtedness income through 2012.

Executive Comp for Financial Institutions

Responding to taxpayer outrage over executive compensation in troubled financial institutions that have to be bailed out, Congress enacted restrictions on senior executive compensation for companies that sell more than $300 million in assets under the Federal Government’s new troubled asset recovery program. Deductible compensation for the CEO, CFO and three other highest paid officers is limited to $500,000, and “golden parachutes” are sharply curtailed, with possible non-deductibility for the payor and a 20% excise tax on the payee.

Community Bank Relief on Fannie and Freddie Stock Losses

Community banks can report losses on Fannie Mae and Freddie Mac preferred stock as ordinary, rather than capital losses.

Disaster Relief

The Act provides a variety of tax relief measures for disaster victims, and this alert contains only highlights. Victims and their advisers should consult the Act for details and additional relief provisions that might apply.

Businesses can deduct up to 50% of the demolition and cleanup costs incurred before 2011, can expense hazardous waste cleanup costs, and can carry back NOLs for five years instead of two. Also, small businesses in certain flood areas can get a 40 percent credit on wages up to $5,000 from the disaster date until the end of the year. For individuals in flood areas, the 10% and $100 floor on casualty losses is eliminated. Those who shelter disaster victims for at least 60 days can qualify for an extra personal exemption of $500 per victim (up to four). Discharge of personal debts of flood victims would not result in income. Charitable deductions limits for individuals and corporations were suspended for contributions to Midwestern relief efforts. Through 2010, the 10 percent IRA penalty for early withdrawal of up to $100,000 would be waived if it is a disaster assistance recovery distribution in a Midwest flood zone. For victims in presidentially declared disasters in 2008 and 2009, Section 179 expensing is increased from $250,000 to $350,000 for disaster area expenditures for business through 2011. First-year depreciation is increased on new and personal property investment in the disaster area and any depreciation benefits may be claimed against the AMT.

Tax Provisions in New Housing Act

On July 30th President Bush approved the Housing and Economic Recovery Tax Act of 2008.  Here are highlights of its tax provisions: 

• A new refundable tax credit for first-time homebuyers. Your clients’ adult children may want to take advantage of a new refundable credit equal to the lesser of $7,500 or 10% of the price of a first home purchased between April 8, 2008 and July 1, 2009.  The credit phases out at AGI levels over $150,000 for MFJ and $75,000 for singles.  The credit must be repaid over 15 years in equal installments (or entirely repaid if sold earlier), but in the meantime, it’s like an interest-free loan.
• Additional standard deduction for state and local real property taxes paid in 2008.  Home owners who claim the standard deduction would get an additional deduction for state and local real property taxes for 2008.  The maximum amount that may be taken for this additional standard deduction is the lesser of the real estate taxes paid or $500 for single taxpayers and $1,000 for joint filers.  This may help older clients who have paid off their mortgages, or clients in states with little or no income tax to itemize.
• Limitations on the exclusion of gain from the sale of a principal residence.  Beginning in 2009, the taxpayer exclusion from gain on the sale of a principal residence would not apply to any gain allocated to periods of “nonqualified use”. Such use is defined as when the taxpayer is not the principal resident of the dwelling (i.e. when the taxpayer used the home as a vacation home or rental)  However, “nonqualified use” does not include periods when the homeowner vacated their property for military or other official service, change of employment,  health conditions, or other unforeseen circumstances.
• Eliminating costs on housing programs by the AMT.   Taxpayers who claim the low-income housing tax credit and the rehabilitation tax credit will be able to offset these amounts against the AMT.  In addition, interest on tax-exempt housing bonds would no longer be applicable to AMT for housing bonds issued after July 30th.
• Increasing the applicability of the low-income housing credit.  Several changes in this law will increase the availability of this credit.
• Electing to accelerate AMT credits and research credits instead of bonus depreciation.  C corporations eligible to claim the 50% bonus depreciation can choose to accelerate recognition of part of their AMT or R&D tax credits. If so elected, these credits are REFUNDABLE, subject to limitation, even if there is a tax loss. Credits generated through 12/31/05 are eligible for the refundability treatment. Companies that report earnings on a quarterly basis may be in the position of booking a tax asset for the third and fourth quarters of 2008 because of these refundable credits.
• Protecting identities in real estate transactions.  Rather than requiring the seller of real estate to provide their social security number to the purchaser, sellers may now give their personal information to an independent third party for verification to prevent identity theft.
• Enhancing the rehabilitation of government leased buildings.  Rather than restricting a property owner from full use of the rehab tax credit if more than 35 percent of a property is currently leased by the government, the act would give access to the full rehab credit so long as a state or local government or tax-exempt entity does not lease more than 50 percent of the property.
• Delaying the effective date of the worldwide interest allocation election for two years (until tax years beginning after December 31, 2010).  An election may be made only for the first taxable year beginning after December 31, 2010.  A special phase-in rule is provided relating to the first taxable year to which the worldwide interest allocation rules apply. Pursuant to the phase-in rule, a taxpayer making the election makes an adjustment to foreign source income.
• Information reporting on credit card transactions.  Beginning in 2011, financial institutions will have to annually report the gross amount of credit cards processed for businesses.  This report will include the name, address, and taxpayer ID of the payee, who will receive a copy of the report.  This is an attempt to capture possibly unreported cash income and is expected to raise $7.6 billion over 10 years as part of funding of the Housing Act.  Financial institutions will have to reprogram computers by 2011 to capture the information for the report, and those who have credit card revenue will also have to shape up their income reporting compliance.

1. Form 1065, U.S. Return of Partnership Income
2. Form 1041, U.S. Income Tax Return for Estates & Trusts
3. Form 8804, Annual Return for Partnership Withholding Tax (Section 1446)

The regulation does not change the process for requesting an extension of time to file, nor does it affect extensions of time to file other types of business returns, such as those used by S corporations.

The IRS initiated the proposal to reduce the extension of time to file, carefully weighing the impact on partnerships and other affected entities against the burden the existing deadline puts on individuals, who need this information to file timely and accurate returns.

IRS Increases Mileage Rates through Dec. 31, 2008 

The Internal Revenue Service today announced an increase in the optional standard mileage rates for the final six months of 2008. Taxpayers may use the optional standard rates to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

The rate will increase to 58.5 cents a mile for all business miles driven from July 1, 2008, through Dec. 31, 2008. This is an increase of eight (8) cents from the 50.5 cent rate in effect for the first six months of 2008.

In recognition of recent gasoline price increases, the IRS made this special adjustment for the final months of 2008. The IRS normally updates the mileage rates once a year in the fall for the next calendar year.

While gasoline is a significant factor in the mileage figure, other items enter into the calculation of mileage rates, such as depreciation and insurance and other fixed and variable costs.

The optional business standard mileage rate is used to compute the deductible costs of operating an automobile for business use in lieu of tracking actual costs. This rate is also used as a benchmark by the federal government and many businesses to reimburse their employees for mileage.

The new six-month rate for computing deductible medical or moving expenses will also increase by eight (8) cents to 27 cents a mile, up from 19 cents for the first six months of 2008. The rate for providing services for charitable organizations is set by statute, not the IRS, and remains at 14 cents a mile.

Mileage Rate Changes

Economic Stimulus Payments on the Way

The Internal Revenue Service has begun to transfer economic stimulus payments to millions of Americans, some of whom will see payments in their bank accounts as early as today.

The IRS will issue payments of up to $600 ($1,200 for married couples) plus $300 for eligible children younger than 17, throughout the spring and summer. The first wave of payments will go to people who opted for direct deposit on their 2007 income tax returns.

“People who chose direct deposit will receive their economic stimulus payments the quickest,” IRS Commissioner Doug Shulman said. “We know there are many people who are eligible for an economic stimulus payment who have not filed a tax return. If you think you may be eligible, even if you don’t normally file a tax return, please check it out. And, use direct deposit to get your payment faster.”

Whether a taxpayer opted for direct deposit determines how soon the payment will arrive. The first cycle of paper checks will be mailed starting May 9.

Even people who normally do not have a filing requirement may be eligible for the stimulus payment. People who have no filing requirement must have at least $3,000 in qualifying income. Qualifying income includes any combination of earned income, nontaxable combat pay they elect to include in earned income and certain payments from Social Security, Veterans Affairs and Railroad Retirement.

People with at least $3,000 in qualifying income may qualify for an economic stimulus payment of $300 ($600 for married couples) plus the $300 per qualifying child payment. However, they must file a 2007 income tax return by Oct. 15 , 2008, to receive a stimulus payment. They can use the simple Form 1040A and provide basic information. Form 1040A is available on IRS.gov, the official IRS Web site.

The payment schedule announced earlier this year is for people who filed early enough to have their tax returns processed by April 15. People who did not submit a return in time for it to be processed by April 15 may see their stimulus payments later than the scheduled dates.

Below are the schedules for economic stimulus payments related to tax returns processed by April 15, 2008: 

Some taxpayers may receive smaller economic stimulus payments than they anticipated. By law, the stimulus payments are offset to satisfy past-due taxes, student loans, child support and certain other debts.

The IRS will send notices to taxpayers who have already filed a 2007 tax return and who are eligible for an economic stimulus payment. This notice will serve as an important recordkeeping document and should be retained by taxpayers. By keeping people informed, the IRS hopes to reduce calls to customer service representatives who are still busy helping taxpayers complete tax returns.
 

Congress Reaches Agreement on Stimulus Package

             February 7, 2008 the Senate voted in favor of an amended version of H.R. 5140 that included low-income senior citizens and disabled veterans among recipients of tax rebate checks.  The House quickly followed suit approving the bill.  President Bush has indicated he will sign the legislation into law.   Treasury Secretary Henry Paulson has said the IRS would be able to begin sending checks by early May.

Individuals:

There are two components.

1. The minimum rebate amount is $300 ($600 for married filing jointly).

The taxpayer will receive this amount if he has at least $1 of tax liability or $3,000 in qualifying income, defined as the sum of net self employment income, veterans’ disability payments (including payments to survivors of disabled veterans), and social security benefits.  This payment is refundable, meaning the recipient gets the full amount.

The maximum rebate amount is $600 ($1,200 for married filing jointly).  The taxpayer’s rebate under this credit will be equal to the minimum of his tax liability or 10% of the first $6,000 of taxable income ($12,000 if married filing jointly).  This credit is not refundable.

2. Qualifying Child Credit.

If a taxpayer receives $1 of the income tax rebate and the taxpayer has children, the taxpayer will also receive $300 per child.  The payment is refundable, meaning the recipient is entitled to the full child credit without regard to income tax liability.

            The amount of the credit (including both the basic credit and the qualifying child credit) is phased out at a rate of 5% of adjusted gross income beginning at $75,000 ($150,000 in the case of joint returns).  Residents of the U.S. possessions will also receive the benefit, but the provision denies the basic credit and the qualifying child credit to individuals if the tax return does not include valid identification numbers for all persons listed on the return.    Safeguards to ensure that illegal immigrants do not obtain rebates or bonus payments remain in the final agreement.

Business Tax Provisions:

1. The Bill increases the expensing limit under §179 to $250,000 and the phase-out to $800,000 for 2008.  This is an increase from the scheduled expensing limit of $128,000 and the phase-out threshold of $510,000.
   

2. The Bill also allows a trade or business to depreciate an additional 50 percent of the cost of an asset acquired and placed into service in 2008.  The types of property eligible for bonus depreciation will be the same as included in previous depreciation packages:
   

1. Tangible property that has a recovery period not exceeding 20 years, 

2. Purchased computer software, 

3. Water utility property, and 

4. Qualified leasehold improvement property.

The bonus depreciation will be allowed under the AMT.  The proposal is effective for calendar year 2008 beginning after the date of first Committee action.

Other Provisions:
The remaining provisions of the Bill include provisions temporarily increasing conforming loan limits for the Federal Housing Authority.

The proposal raises FHA’s loan limit, the dollar amount of a mortgage that FHA can insure, for its single-family program from 87 percent of the conforming loan amount to as high as 175 percent (effectively $362,790 to $729,750) of the conforming loan limit in certain geographic regions where the cost of housing is very high and from 48 percent to 65 percent (effectively $200,160 to $271,050) of the conforming loan limit in less expensive markets.

FHA would also have the authority to raise those loan limits by up to an additional $100,000 if market conditions warrant such increases.

This proposal expires on December 31, 2008.

None of the provisions of this bill have any affect on tax return preparation for 2007; however the returns submitted for 2007 will generate the refunds distributed to taxpayers.  It is anticipated that many more taxpayers will seek to have their returns prepared earlier rather than later in order to participate quickly in the refund program.

 New IRS E-Mail and Telephone Scams Using the IRS Name;
Advance Payment Scams Starting 

The Internal Revenue Service today warned taxpayers to beware of several current e-mail and telephone scams that use the IRS name as a lure. The IRS expects such scams to continue through the end of tax return filing season and beyond.

The IRS cautioned taxpayers to be on the lookout for scams involving proposed advance payment checks. Although the government has not yet enacted an economic stimulus package in which the IRS would provide advance payments, known informally as rebates to many Americans, a scam which uses the proposed rebates as bait has already cropped up.

The goal of the scams is to trick people into revealing personal and financial information, such as Social Security, bank account or credit card numbers, which the scammers can use to commit identity theft.

Rebate Phone Call

At least one scheme using the word “rebate” as part of the lure has been identified. In that scam, consumers receive a phone call from someone identifying himself as an IRS employee. The caller tells the targeted victim that he is eligible for a sizable rebate for filing his taxes early. The caller then states that he needs the target’s bank account information for the direct deposit of the rebate. If the target refuses, he is told that he cannot receive the rebate.   

This phone call is a scam. No legislation has yet been enacted that would allow the IRS to provide advance payments to taxpayers or that determines the details of those payments. Moreover, the IRS does not force taxpayers to use direct deposit. Those who opt for direct deposit do so by completing the appropriate section of their tax return, with bank routing and account information, when they file; the IRS does not gather the information by telephone.

Legislative TAX Update

            The end of 2007 has seen Congress very busy with legislative acts which will have great impact not only on 2007 tax filings but for years to come.

            Not only did Congress pass The Tax Increase Protection Act of 2007 and the Energy Bill both reported to the NSTP membership last week but on December 20 both houses of Congress passed the Mortgage Relief Bill.  The President has already signed the Energy Bill and Virginia Tech Relief into law and today, December 26, signed the Mortgage Relief Bill into law. The White House has indicated he will sign The Tax Increase Protection Act of 2007 upon the legislation reaching his desk.

            The following is a summary of the most recently passed legislation: 

The Prevent Taxation of Payments to Virginia Tech Victims and Families Act

Signed into law by President Bush on December 19, 2007.

• Excludes from gross income payments from a special memorial fund for victims of the April 2007 Virginia Tech tragedy.

• Increases the penalty for failing to file a partnership return by $1 beginning in 2008 to pay for the tax break.

It should be noted that along with the penalty in the Mortgage Debt Relief Act of 2007, the penalty is now $86 per partner per month.

Mortgage Forgiveness Debt Relief Act of 2007

Passed by Congress, awaiting the signature of President Bush.

Mortgage Relief:

• A three-year exception for debt forgiveness on qualified home loans, retroactive to January 1, 2007.

• Excludes from taxation discharges of up to $2 million of indebtedness that is secured by a principal residence and is incurred in the acquisition, construction or substantial improvement of the principal residence.

• Indebtedness also includes refinancing of such acquisition indebtedness as long as the refinancing does not exceed the amount of the original indebtedness.

• The definition of principal residence for purposes of the Act is the same as that under §121 for the home sale gain exclusion.

• The basis of the taxpayer’s principal residence is reduced by the amount excluded from income under the Act. 

• Tax years relief is granted include 2007, 2008 and 2009.

Mortgage Insurance Deduction:

• Extended the Tax Relief and Health Care Act of 2006 allowing taxpayers to take an itemized deduction for premiums paid or accrued on qualified mortgage insurance as deductible qualified residence interest for three years through December 31, 2010.

• Deduction is phased out at 10 percent for each $1,000 by which the taxpayer’s AGI exceeds $100,000.

• Qualified mortgage insurance is mortgage insurance provided by the Veterans Administration, the Federal Housing Administration, the Rural Housing Administration or private mortgage insurance in Section 2 of the Homeowners Protection Act of 1998.

Survivor’s Home Sale Exclusion:

• Beginning January 1, 2008, the sale of a residence that had been jointly owned and occupied by the surviving and deceased spouse is entitled to the $500,000 gain exclusion.

• The sale must occur no later than two years after the date of death of the individual’s spouse.

Volunteer Emergency Responders:

• Individuals receiving a qualified state and local tax benefit, any reduction or rebate of tax and qualified payments of up to $360 each year provided on account of their volunteer services can exclude them from income.

• Tax treatment applies to tax years beginning after December 31, 2007.

Definitions:

The Act clarified the low-income housing credit and the definition of a cooperative housing corporation.

Other provisions:

• Increased the failure to file penalty for partnerships from $50 to $85 per partner per month.  Along with the $1 penalty increase in the Prevent Taxation of Payments to Virginia Tech Victims and Families Act brings the penalty to $86 per partner per month.

• S Corporation new failure to file penalty of 85 per S shareholder per month, up to 12 months.

• Increase in corporate estimated tax payments for corporations with 1 billion-plus assets, by 1.5 percent to 117.25 percent for payments due in July, August and September 2012.

While Congress has recessed for the holidays, they will return to Washington for some last minute legislation which will likely include:

·        Military tax breaks

·        Tax gap legislation

·        Tax shelter issues

·        Lower corporate tax rates

·        Farm-related tax incentives

New e-Mail Scam Offering Cash for Participation in
“Member Satisfaction Survey”

The Internal Revenue Service today issued a consumer alert regarding a new, two-step e-mail scam that falsely promises recipients they will receive $80 for participating in an online customer satisfaction survey.

In the scam, an unsuspecting taxpayer receives an unsolicited e-mail that appears to come from the IRS. The e-mail contains a URL linking to an online “Member Satisfaction Survey.”

The IRS does not initiate contact with taxpayers through e-mail.

In this case, the e-mail notifies the recipient that he or she has been randomly selected to participate in a survey. In return, the IRS will credit $80 to the taxpayer’s account. There are references to the IRS in the “from” line and the “subject” line of the e-mail. The link to the survey and a copyright statement at the bottom of the e-mail also reference the IRS. The survey form features the IRS logo.

In addition to standard customer satisfaction survey questions, the survey requests the name and phone number of the participant and also asks for credit card information.

Tricking victims into revealing private personal and financial information over the Internet, telephone or other means is a practice known as “phishing.”

The IRS does not send unsolicited e-mail. Additionally, the IRS never asks taxpayers for PIN numbers, passwords or similar secret access information for credit card, bank or other financial accounts.

Recipients of questionable e-mail that appears to come from the IRS should not open any attachments or click on any links contained in the e-mail. Instead, the e-mail should be forwarded to phishing@irs.gov.

More information on phishing scams using the IRS name, logo or other identifier can be found on the only genuine IRS Web site, IRS.gov, either at IRS Warns Taxpayers of New E-mail Scams  or Suspicious e-Mails and Identity Theft.

Contractors Working in Chicago—Beware!

“Contractors working in Chicago need to know about a new use tax initiative from the Chicago Department of Revenue (the Department).

As a contractor, you pay use tax on everything you purchase for projects in Illinois. Generally, the use tax is paid to your vendors. The tax collected by the vendor includes the state use tax (6.25%) plus a local use tax, which varies depending on where your vendor accepts the order. If the vendor does not collect the use tax, you must self-assess the tax and remit the state's use tax directly to the Illinois Department of Revenue.

In the 1990s, a special law was enacted that allowed the city of Chicago to impose a 1% use tax on tangible personal property purchased outside the city for use inside the city. The city allows a credit for any local use taxes collected by your suppliers.

For example, if you purchased $10,000 of lumber from your Elmhurst supplier for use in a Chicago construction project, you would have paid a $700 tax to the supplier that includes Elmhurst use tax of $25 (.25%). A separate annual return is required for the city of Chicago, and you would be liable for an additional $75 of use tax ($10,000 x 1% less a credit for the $25 already paid to Elmhurst).

Recently, the Department started a program that targets contractors working in Chicago. The Department has pulled building permits and is matching them to its use tax register. If your company has not registered to file the use tax return, the Department will be contacting you and will politely ask that you file use tax returns from July 2000 to date, which will include penalties and interest.”

Federal Minimum Wage Increases by $2.10!
President Bush has signed a bill that increased the Federal Minimum Wage rate. The increase is the first ever since 1997! In approximately 60 days, the new rate will take effect and employers must comply. States that are operating under the current Federal Minimum Wage of $5.15 will soon need to comply with the new rate. Although many states are currently operating under a State Minimum Wage that is already higher than the Federal Minimum Wage, they still must post the new notice reflecting the new rate. Purchase The Complete Poster or The Federal Labor Law Poster which will reflect the new Federal Minimum Wage to stay in compliance with the labor law posting requirements.

3 step increase is scheduled as follows:

$5.85 - Summer of 2007 | $6.55 - Summer of 2008
$7.25 - Summer of 2009

Congress on Thursday, May 24, 2007 approved the Federal Minimum Wage increase and President Bush signed the bill into law on Friday, May 25, 2007. It will take two months from the day of the signing for the law to go into effect. The pay increase will be a total of $2.10 and it will be increase in three increments, first increase of .70 cents will occur before the end of summer making the new minimum wage $5.85 per hour, another .70 cents increase sometime next year will make the minimum wage $6.55 per hour and the final increase of .70 cents will put the new minimum wage at $7.25 per hour by summer of 2009.

IRS Warns Taxpayers of New E-mail Scams

The Internal Revenue Service today alerted taxpayers to the latest versions of an e-mail scam intended to fool people into believing they are under investigation by the agency’s Criminal Investigation division.

The e-mail purporting to be from IRS Criminal Investigation falsely states that the person is under a criminal probe for submitting a false tax return to the California Franchise Board. The e-mail seeks to entice people to click on a link or open an attachment to learn more information about the complaint against them. The IRS warned people that the e-mail link and attachment is a Trojan Horse that can take over the person’s computer hard drive and allow someone to have remote access to the computer.

The IRS urged people not to click the link in the e-mail or open the attachment.

Similar e-mail variations suggest a customer has filed a complaint against a company and the IRS can act as an arbitrator. The latest versions appear aimed at business taxpayers as well as individual taxpayers.

The IRS does not send out unsolicited e-mails or ask for detailed personal and financial information. Additionally, the IRS never asks people for the PIN numbers, passwords or similar secret access information for their credit card, bank or other financial accounts.

Recipients of questionable e-mails claiming to come from the IRS should not open any attachments or click on any links contained in the e-mails. Instead, they should forward the e-mails to phishing@irs.gov  

The IRS and the Treasury Inspector General for Tax Administration work with the U.S. Computer Emergency Readiness Team (US-CERT) and various Internet service providers and international CERT teams to have the phishing sites taken offline as soon as they are reported.

Since the establishment of the mail box last year, the IRS has received more than 17,700 e-mails from taxpayers reporting more than 240 separate phishing incidents. To date, investigations by TIGTA have identified host sites in at least 27 different countries, as well as in the United States.

Other fraudulent e-mail scams try to entice taxpayers to click their way to a fake IRS Web site and ask for bank account numbers. Another widespread e-mail tells taxpayers the IRS is holding a refund (often $63.80) for them and seeks financial account information. Still another email claims the IRS’s ‘anti-fraud commission’ is investigating their tax returns.

Prior to this announcement by the IRS, the April 17 deadline applied just to individuals in the District of Columbia and six Eastern states served by the IRS processing facility in Massachusetts, where Patriots Day is observed on April 16.

Federal deadlines extended. For federal income tax purposes, the April 17, 2007, deadline applies to any of the following:

• 2006 federal individual income tax returns, whether filed
  electronically or on paper;
• requests for an automatic 6-month extension of time to file,
  whether submitted electronically or on Form 4868;
• tax year 2006 balance due payments, whether made electronically (through direct debit or credit card) or by check;
• tax-year 2006 contributions to a Roth or traditional IRA;
• individual estimated tax payments for the first quarter of 2007,
  whether made electronically or by check; and
• individual refund claims for tax year 2003, where the regular
  3-year statute of limitations is expiring.

Illinois deadlines extended: The Illinois Department of Revenue has announced that the Department will extend the due date for filing personal income tax returns and making payments until Tuesday, April 17, 2007. Illinois allows an automatic 6-month extension to file IL-1040 returns, which will extend the due date until October 17, 2007.

U.S. Treasury and Illinois Department of Revenue Announce First in the Nation Federal-State Tax Payment Pilot

“Jan. 11, 2007, Chicago — Illinois business taxpayers are the first in the nation to be able to pay state withholding and federal taxes at the same time through a single system, the U.S. Department of the Treasury’s Financial Management Service (FMS) and the Illinois Department of Revenue announced today.

While the Electronic Federal Tax Payment System (EFTPS), a free service from Treasury, has been available for all federal tax payments for more than 10 years, the pilot with Illinois marks the first time state withholding taxes also may be paid via EFTPS www.eftps.com.”

Congress Passes Year-End Tax Legislation
December 9, 2006. 
“The legislation includes over three dozen extensions of existing tax provisions, many of which had expired at the end of 2005 and would be retroactively extended. These include the state sales tax deduction, the above-the-line deduction for higher education tuition and fees, the above-the-line deduction for out-of-pocket teachers' expenses, the research and development credit, the welfare-to-work and work opportunity credits, and the 15-year amortization of leasehold improvements. The 2006 tax forms issued by the IRS do not include these provisions, and the IRS will be required to create supplemental instructions explaining how these items are to be handled on the tax return. The legislation makes permanent several provisions of the Tax Increase Prevention and Reconciliation Act of 2005.

The legislation includes about three dozen provisions that make substantive changes to the tax law beyond simply extending existing provisions. These changes include several changes to the rules for health savings accounts including expanded funding options, expansion of the domestic manufacturing deduction to activities in Puerto Rico, changes in the alternative minimum tax calculation of the refundable credit amount, new reporting requirements with respect to the issuance of stock under incentive stock option plans, a mortgage interest deduction for mortgage insurance premiums, an excise tax on unrelated business taxable income of charitable remainder trusts, a variety of reforms to support whistleblowers, an increase in frivolous return penalties, and an expansion of qualified mortgage bonds for veterans. Several of the provisions extended include significant modifications, including the alternative incremental credit and new alternative simplified credit for the research credit, combining and modifying the welfare-to-work and work opportunity credits, and inclusion of computer technology and equipment in the special rules for charitable contributions of scientific property used in research.”

~

On Dec. 20, 2006, the “Tax Relief and Health Care Act of 2006” was signed into law by the President.

Here are the highlights:

Research Credit Extended for Two Years and Modified for 2007 - The research credit is retroactively reinstated and made available for amounts paid or incurred after Dec. 31, 2005 and before Jan. 1, 2008.  Other changes include increased rates for alternative incremental credit and a new alternative simplified research credit.

Employment Credits Extended and Modified - The work opportunity tax credit (WOTC) is retroactively reinstated and made available for wages paid or incurred to eligible individuals who begin work for the employer after Dec. 31, 2005, and before Jan. 1, 2008.  Additionally, the welfare-to-work tax credit is retroactively reinstated and made available for wages paid or incurred to eligible individuals who begin work for the employer after Dec. 31, 2005, and before Jan. 1, 2008.

The Act also makes these changes:

(1) The WOTC is combined with the welfare-to-work credit for individuals who begin work for the employer after Dec. 31, 2006.

(2) Eligibility for the WOTC is expanded by raising the age ceiling for food stamp recipients from 25 to 40.

(3) the WOTC family income restrictions for ex-felons (i.e., no more than 70% of BLS lower living standard) are eliminated.

(4) the filing deadline for a pre-screening notice (on Form 8850) is extended from 21 days to 28.

~

Indian Employment Credit Extended for Two Years

Credit for Qualified Zone Academy Bonds Extended for Two Years

New Markets Tax Credit Extended for One Year & Modified

Optional Itemized Deduction for Sales and Use Taxes Extended for Two Years

Above-the-Line Deduction for Expenses of Educators Extended for Two Years

Above-the-Line Deduction for Eligible Individual's Higher-Education Expenses Extended for Two Years

Election to Include Combat Pay as Earned Income for EITC Purposes Extended for Two Years

Accelerated Writeoff for Qualified Leasehold Property and Qualified Restaurant Improvements Extended for Two Years - The Act extends for two years the 15-year straight line writeoff (instead of straight-line 39 year writeoff) for qualified leasehold improvements and qualified restaurant improvements. The accelerated writeoff applies to property placed in service after Dec. 31, 2005, and before Jan. 1, 2008.

Quicker Writeoff for Business Property on Indian Reservation Extended Through 2007

Opportunity for Fiscal Year Taxpayers to Make Certain Revived Elections

Refundable Credit for Unused AMT Credit - the minimum tax credit allowable for the tax year is the greater of the AMT refundable credit amount or the amount of the credit otherwise allowable.

Placed-in-Service Deadline for Some GO Zone Property Is Extended to Dec. 31, 2010 and Further - Taxpayers can claim a bonus first-year depreciation allowance equal to 50% of the adjusted basis of qualified Gulf Opportunity Zone (GO Zone) property.  For tax years beginning after Aug. 27, 2005, the Act provides that the placed-in-service deadlines for bonus first-year depreciation purposes don't apply to “specified Gulf Opportunity Zone extension property.”

Liberalized Rules for Health Savings Accounts (HSAs) – The New Act liberalizes the HSA rules by:

... allowing one-time-only rollovers from health FSAs and HRAs into HSAs;

... providing that FSA coverage during a grace period following the end of the plan year is disregarded coverage for HSA purposes;

... repealing the annual plan deductible limit on HSA contributions;

... providing for earlier indexing of cost-of-living adjustments to HSA figures;

... approving a full contribution for months preceding the month a taxpayer becomes an eligible individual;

... modifying the employer comparable contribution rules; and

... permitting one-time rollovers from IRAs to HSAs.

Tax Court Gets Authority to Review Equitable Innocent Spouse Relief

Extensions and Changes for Energy-Related Provisions - The Act extends, adds and modifies these energy provisions:

• Credit for electricity produced from certain renewable resources extended.
• Credit for residential energy efficient property extended and clarified.
• Energy credit for certain business purchases extended.
• Credit to holders of clean renewable energy bonds extended.
• New special depreciation allowance for cellulosic biomass ethanol plant property.
• Reduced excise tax rate for methanol of ethanol fuel derived from coal extended.
• Credit for new energy efficient homes extended.
• Deduction for energy efficient commercial buildings extended.
• Qualified expenditures from the LUST fund expanded.
• Clean coal gasification tax credit modified.
• Coke and coke gas production tax credit modified.

Frivolous Tax Submissions Penalty Increased and Modified - The Act increases the penalty for frivolous tax return submissions from $500 to $5,000 and expands the penalty to all taxpayers and all types of Federal taxes.

Temporary TIPRA Provisions Made Permanent - The Act makes permanent a number of provisions that were enacted on a temporary basis in the Tax Increase Prevention and Reconciliation Act of 2005 including the following:

... Tax treatment of environmental cleanup funds.

... Simplification of the active trade or business test.

... Enhancing veterans' access to affordable mortgages.

... Tax treatment of self-created musical works.

... Loans to qualified continuing care facilities.

Premiums for Mortgage Insurance - The Act establishes an itemized deduction for the cost of premiums for mortgage insurance on a qualified personal residence for amounts paid or accrued after Dec. 31, 2006 and before Jan. 1, 2008.

“President Bush signed the most comprehensive pension funding reform legislation since 1974 into law on August 17, 2006.

Under the Pension Protection Act of 2006, most companies with defined-benefit plans will have seven years to become fully funded.  Higher retirement savings limits for 401(k) plans and Individual Retirement Accounts that were first enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001, which were scheduled to expire in 2011, have been made permanent.”

Here are some of the highlights:

Liberalized Rules for Qualified Plan and IRA Contributions, Distributions, and Rollovers

·         Pre-Act law did not allow non-spouse beneficiaries to roll over inherited qualified plan accounts to IRAs; such rollovers were permitted only for spouse-beneficiaries.  For distributions after 2006, the new Act permits rollovers of distributions from an eligible retirement plan of a deceased employee to a non-spouse beneficiary's IRA. The rollover is treated as an eligible rollover distribution.

·         Under pre-Act law, an employee may make a direct rollover of after-tax contributions from a qualified retirement plan to a defined contribution plan that provides for separate accounting for these contributions and their earnings. After-tax contributions may also be rolled over to an IRA.  For tax years beginning after 2006, the Act permits after-tax contributions to be rolled over from a qualified retirement plan to (1) another qualified retirement plan or (2) a tax-sheltered annuity.  

·         Taxpayers with modified AGI of $100,000 or less generally may roll over amounts in a traditional IRA into a Roth IRA. The amount rolled over is includible in income as if a withdrawal had been made, but the 10% early withdrawal tax does not apply. Participants in qualified retirement plans, tax-sheltered annuities, or a governmental plan may roll over distributions from the plan or annuity into a traditional IRA, if certain requirements are met. However, under pre-Act law, distributions from such plans cannot be rolled over into a Roth IRA. However, amounts that have been distributed from a tax-qualified retirement plan, a tax-sheltered annuity, or a governmental plan may be rolled over into a traditional IRA, and then rolled over from the traditional IRA into a Roth IRA. For distributions after 2007, the Act allows distributions from qualified retirement plans, tax-sheltered annuities, and governmental plans to be rolled over directly into a Roth IRA.

·         For the 2007, 2008, and 2009 tax years, the Act permits a class of taxpayers termed “applicable individuals” (employees victimized by employer bankruptcies) to elect to make additional IRA contributions of up to $3,000 per year.

·         Under pre-Act law, the regulations provide that a hardship or unforeseeable emergency includes a hardship or unforeseeable emergency only of a participant's spouse or dependent. The IRS will revise the hardship/unforeseeable emergency regulations in order to provide that an event that would be a hardship or unforeseeable emergency includes an event if it occurs with respect to any beneficiary under the plan.

·         For tax years beginning after 2006, IRS will develop and make available forms allowing all or a portion of a taxpayer's refund to be deposited in his IRA (or his spouse's IRA, in the case of a joint return).

·         Under pre-Act law, there was no penalty-tax exception for distributions to reservists called up for duty.  Under the new Act, payouts made from 401(k) or 403(b) plans to called-up reservists are not subject to 10% premature withdrawal penalty tax.

·         The Act provides that the 10% early withdrawal tax does not apply to post-enactment-date distributions from a governmental defined benefit pension plan to a qualified public safety employee who separates from service after age 50.

Deduction Limitations
Under pre-Act law, generally, plans can deduct contributions up to 100% of the plan's current liability. Contributions in excess of the limit are subject to a 10% excise tax. Because the plan's liability on termination is generally higher than its current liability, there is an exception that allows a deductible contribution equal to 100% of the plan's termination liability, but only in the year of termination.  For contributions after 2007, the new Act increases the deductible limit for single-employer plans to the year's normal cost (generally the cost of benefits accrued in the year) plus the amount necessary to fully fund the funding target. In addition, employers can contribute and deduct a cushion. The cushion is 50% of the funding target plus additional amounts reflecting projections of the participants' compensation and the statutory compensation limits. The Act allows plans to contribute and deduct the maximum at risk liability for both target and normal if this is more.  For 2006 and 2007, the deduction limit is increased from 100% to 150% of the plan's current liability.

Charitable Giving Incentives
Under pre-Act law, if an amount withdrawn from a traditional or Roth IRA is donated to a charitable organization, the rules relating to the tax treatment of withdrawals from IRAs apply to the amount withdrawn and the charitable contribution is subject to the normally applicable limitations on deductibility of contributions.  For distributions in tax years beginning in 2006 and 2007, the Act provides an exclusion from gross income, up to $100,000, for otherwise taxable IRA distributions from a traditional or Roth IRA that are qualified charitable distributions.  If the IRA owner has any IRA with nondeductible contributions, a special rule applies in determining the portion of a distribution that is includible in gross income and thus is eligible for qualified charitable distribution treatment. Under the special rule, the distribution is treated as consisting of income first, up to the aggregate amount that would be includible in gross income if the aggregate balance of all IRAs having the same owner were distributed during the same year.  Distributions that are excluded under the new provision are not taken into account in determining the individual's deduction, if any, for charitable contributions.

July 2006
The House passed two bills before it recessed: a “trifecta” bill carrying estate tax changes, extenders, and a minimum wage increase; and a pension bill. The Senate is slated to take up both bills before its scheduled departure on August 4^th for the summer recess.  These bills are important since there are many expiring tax laws that need to be extended.

UPDATES TO TAX RECONCILIATION ACT
May 11, 2006, Congress passed the Tax Reconciliation Act of 2005 (not 2006 because it is a carryover of the 2005 budget).  May 17, 2006 it was signed by President Bush.

Roth conversion limit of $100,000 eliminated after 2009.  If your adjusted gross income was over $100,000, you are not allowed to convert your Traditional IRA into a Roth IRA.  In 2010, the limit will not be in effect, therefore, allowing any taxpayer to convert their IRAs.  A great planning tool for high wealth individuals - they can fund a traditional IRA through 2009 and convert it in 2010.  The conversion is taxable but after that the earnings are tax free.  Prior to this, high wealth individuals were not allowed to convert a traditional IRA into a Roth IRA.  Conversion does not trigger the 10% early withdrawal penalty.  Also, taxpayers who were “married filing separately” were not allowed to convert, however, this rule is eliminated in 2010.

AMT relief that comes in the form of higher thresholds.  We are not going to see a repeal of the AMT at this point – only this band aid to assist middle income families to avoid becoming subject to AMT.  Without this new act, the AMT exemption amounts in 2006 would have gone back to the exemption amounts that were in effect in 2000.  The change is for 2006 only.

Nonrefundable Personal Credits allowed for AMT calculation through 2006.  Under the new act, the maximum that may be claimed for personal credits for 2006 will remain the same as in 2005. The credit include the dependent care credit, the credit for the elderly and permanently and totally disabled, the mortgage credit, the child tax credit, the Hope and Lifetime Learning credits, the adoption credit, and the lower income saver's credit (“personal credits”).

Lower Capital Gain Rates are extended for two more years through 2010.  The 15% capital gain rate will still be in effect for taxpayers.  If you are in the 10% or 15% tax bracket, your capital gains rate will remain at 5%.

Kiddie Tax Rule changed from “children under 14” to “children under 18”.  A child subject to the kiddie tax pays tax at his or her parents' highest marginal rate on the child's unearned income over $1,700 (for 2006) if that tax is higher than the tax the child would otherwise pay on it. The parents can instead elect to include on their own return the child's gross income in excess of $1,700 (for 2006).  A child is subject to the Kiddie Tax Rule if he or she was not 14 on 12/31 of the tax year.  The new law has changed this to 18 as of January 1, 2006.  If the parents are not alive or if the child files a Married Filing Joint return, the rule does not apply.  Tax planning strategies are available to help ease the pain of this change – investments in vehicles that do not incur taxes, such as municipal bonds, or a change in mindset and investment strategies.  529 plans will now be more popular with this change in the law.

Section 179 limits continue to apply (subject to inflation).  Section 179 limits for 2006 are $108,000 and $430,000.  Without the limits extended, the limit for 2006 would have dropped back down to $25,000 and $200,000.  Off-the-shelf computer software continues to qualify as Section 179 property.

There were several other law changes; however, these are the highlights of the new law.  A “follow-up” law is expected to be passed to include items that were not included in this act.

IRS ANNOUNCES SPLIT-REFUND PROGRAM
“In an effort to encourage higher savings and more banking, IRS has announced that it is creating a new split-refund program to allow taxpayers to directly deposit their refunds in up to three financial accounts.

IRS says the split-refund program will allow taxpayers to conveniently designate—at the time they file—and deposit their refunds with any U.S. financial institution as long as they provide valid routing and account numbers. Taxpayers will attach a new Form 8888 to their returns indicating amounts for each allocation and providing account information. Taxpayers will be able to use the new Form 8888 to choose to have their refunds deposited into one, two or three accounts such as checking, savings and retirement account.

Many individuals who use withholding as a means of saving probably do so even though they get no interest on the over-withheld amount that is timely repaid by IRS through a refund because they know they would spend the extra funds if they were paid currently rather than being withheld. While the loss of the interest is undesirable, the forced saving may be a good choice for individuals who would otherwise lack the discipline to save any amounts that weren't withheld. Individuals may be able to use the split refund program to achieve an even a higher level of savings. That's because, they will be able to direct IRS to deposit only the amount needed for everyday bills into their checking accounts and to deposit the balance into their savings or retirement account. In the past, they might have put the entire amount in their checking account and spent it all even though some was not needed for bills.

IRS says that the ability to split or allocate their direct deposit refunds among multiple accounts will be available to all individual filers, whether they file Forms 1040, 1040A/EZ, 1040NR or any of the other 1040 series forms. Taxpayers who want their entire refund deposited directly into one account won't have to complete Form 8888. Rather, they will continue to supply the required information directly on their tax return.”

Federal Trade Commission Identity Theft website - http://www.consumer.gov/idtheft/index.html

OnGuardOnline.gov provides practical tips from the federal government and the technology industry to help you be on guard against Internet fraud, secure your computer, and protect your personal information -http://onguardonline.gov/index.html

The IRS also has established an electronic mailbox for taxpayers to send information about suspicious e-mails they receive which claim to come from the IRS. Taxpayers should send the information to: phishing@irs.gov.

More information is on the IRS’ website at http://www.irs.gov/newsroom/article/0,,id=155682,00.html

Be alert for on-line fraud from emailers pretending to be the IRS. Logos and other identification looks authentic but the IRS never uses email for your tax matters. Never give any personal information on the internet without verifying who is asking for it - even if it looks legit. Delete any email that looks like it is from the IRS. It's not.