Deducting receivables as bad business debts

FAQ: What’s this about the new first-time homebuyer credit for existing homeowners?

The first-time homebuyer tax credit has proven to be one of the most popular tax incentives in recent years. Until recently, the credit was generally limited to “first-time homebuyers.” Although the full ($8,000) is still limited to “first-time” homebuyers, “long-time” homeowners of the same principal residence may be eligible for a reduced credit of $6,500. This new provision can give a boost to younger homeowners looking to trade up, or simply move on from their current home, as well as seniors looking to downsize.

The new “new homebuyer” tax credit

The homebuyer tax credit would have expired on November 30, 2009 had Congress not extended the credit. The new credit is extended to homes purchased before (1) May 1, 2010, or (2) July 1, 2010 if the taxpayer enters into a written binding contract before May 1, 2010 to close on the home before July 1, 2010. The credit amount remains at a maximum of $8,000, or 10 percent of the home’s purchase price (whichever is less). However, the new law places a cap on the home’s purchase price, which cannot exceed $800,000 in order to claim the credit. In addition, a modified credit is available for “repeat” homebuyers, discussed below.

Comment. The “first-time homebuyer credit” is somewhat of a misnomer. Under the original – and now extended – credit, you did not (and still do not) technically have to be purchasing your very first home to qualify for and take the credit. A first-time homebuyer for purposes of the $8,000 credit is a taxpayer who an individual (and spouse, if married) who had no present ownership interest in a principal residence during the three-year period ending on the date the home is purchased. This means that you could have previously owned a home as long as you have not had any ownership interest in a personal residence for at least the three years prior to purchasing the home for which you are claiming the credit.

Congress raises income limits

The homebuyer tax credit is also now available to a greater segment of the home-buying population. The new law has increased the income limits that phase out the credit, allowing higher income individuals and families to qualify. Phase-out of the credit begins under the new law at $125,000 modified adjusted gross income (AGI) for single taxpayers (up from $75,000) and at $225,000 for married taxpayers filing joint returns (up from $150,000). The phaseout range itself is $20,000, thereby reducing the credit to zero for individual taxpayers with modified AGI of more than $145,000 ($245,000 for married joint filers). The credit is reduced proportionately for taxpayers with modified AGIs between these amounts.

“Long-time” homeowners qualify for reduced $6,500 credit

A reduced homebuyer tax credit may be claimed by existing homeowners who have owned and lived in their home for a long period of time. The reduced tax credit, of up to $6,500, may benefit long-time homeowners who are ready to move up or simply move on from their current home. The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $6,500. Purchases of homes priced above $800,000 are not eligible for the tax credit.

To qualify for the reduced $6,500 credit, you must be a “long-time resident” as defined by the law. For purposes of the credit, a “long-time resident” is defined as a person who has owned and resided in the same home for at least five consecutive years of the eight years prior to the purchase of the new residence. Importantly, for married taxpayers, the law tests the homeownership history of both the spouses.

If you are an existing, repeat homebuyer who qualifies for the reduced credit, you do not have to purchase a home that is more expensive than your previous home to qualify for the tax credit. There is no requirement that the new principal residence be a “move up” property; it can be less expense than your former home. However it must be your new “principal residence” in order to claim the credit. Moreover, a repeat homebuyer does not need to sell or otherwise dispose of his or her current residence to qualify for the $6,500, either, as long as your new home becomes your principal residence.

Example. Bob and Edith are married and are both eligible to claim the reduced $6,500 credit for existing “long-time residents.” Their modified AGI is $240,000, which results in being $15,000 over the beginning of the phaseout for married taxpayers filing jointly. They will be able to claim a partial reduced homebuyer credit in the amount of $1,650 (15,000/$20,000 = 0.75; 1.0-0.75 = 0.25. $6,500 x 0.25 = $1,625).

While the homebuyer credit can be very valuable, it is also very complex. In addition to the provisions we have described, there are special rules for repayment, new documentation requirements, a purchase price cap, and more. Please contact our office for more details about the first-time homebuyer credit.

FAQ: What tax breaks are officially ending this year?

The end of the 2009 year will also spell the end of many tax breaks for both individuals and businesses. Some of these tax breaks are “temporary” credits and deductions that Congress typically extends for another year or two at the last moment. Other sunsetting provisions are relatively new, with no previous track record on their being extended. In either case, however, the unfamiliar economic climate in which our nation finds itself makes predicting whether Congress will find the funding necessary to extend any particular tax break this time around, beyond 2009, a matter of guesswork. The following is a list of important tax breaks expiring at the end of 2009.

A word to the wise: if you can take advantage of any tax break on this list before 2009 closes, do so. At this point, you cannot -and should not– count on having any of them available in 2010.

Homebuyer tax credit. The first-time homebuyer tax credit expires sooner rather than later in 2009. That is, the credit expires November 30 - the credit provision requires that the residence be “purchased” by November 30, with “purchase” defined as taking place when title passes and the full purchase price is paid (that is, at the “closing”) and not earlier when the contract of sale is executed and a down payment is escrowed. The credit is equal to 10 percent of the purchase price of a principal residence, up to $8,000. It applies to homes purchased after December 31, 2008, and before December 1, 2009.

Itemized state and local sales tax deduction. The ability to deduct state and local sales taxes in lieu of state and local income taxes is available until December 31, 2009, when the itemized state and local sales tax deduction expires.

Higher education tuition deduction. The higher education tuition deduction, permitting taxpayers to take an above-the-line deduction for qualified tuition and related expenses, will expire this year. The maximum deductible amount is $4,000 for taxpayers with adjusted gross income not exceeding $65,000 ($130,000 for joint filers). Taxpayers whose income exceeds that limit but does not exceed $80,000 ($160,000 for joint filers) may deduct up to $2,000 in qualified expenses.

Additional standard deduction for real property taxes. If you claim the standard deduction and also have real estate taxes, you can take an increased deduction ($500 for individuals and $1,000 for married couples filing jointly) for your real estate taxes. This tax break is scheduled to expire at the end of 2009.

Teachers’ classroom expense deduction. The $250 above-the-line deduction for qualified classroom expenses will expire at the end of 2009. The deduction benefits teachers and other educators, from teachers’ aides to school principals, who used their own out-of-pocket money to purchase qualified classroom supplies, such as notebooks, scissors, paper, pens, markers and books. As an above-the-line deduction, the $250 tax break is available to non-itemizers as well.

Bonus depreciation. For businesses, bonus depreciation and enhanced “section 179 expensing,” both designed to - temporarily - encourage business to make capital investments, are set to expire at the end of 2009. Bonus depreciation can be claimed for both regular tax and alternative minimum tax (AMT) liability unless the taxpayer makes an election out.

Enhanced Code Sec. 179 expensing. Enhanced “section 179 expensing,” is set to expire at the end of 2009 in addition to bonus depreciation, as mentioned above. Qualified taxpayers may deduct up to $250,000 of the cost of machinery, equipment, vehicles, furniture, and other qualifying property placed in service during 2009. The $250,000 amount is reduced if the cost of all Code Sec. 179 property placed in service by the taxpayer during the tax year exceeds $800,000.

Research and development credit. The research and development, or R&D credit, is set to expire at the end of 2009. The credit is available for businesses that increase their research expenses. The credit is 14 percent of qualified research expenses that exceed 50 percent of the average qualified research expenses for the three preceding tax years.

COBRA subsidy. The COBRA premium assistance provided as part of the American Recovery and Reinvestment Act of 2009 (2009 Recovery Act) will not benefit individual involuntarily terminated from employment after December 31, 2009. The COBRA subsidy is only available to individuals involuntarily terminated from work between September 1, 2008 and December 31, 2009 The COBRA subsidy under the 2009 Recovery Act provides for individuals to pay only 35 percent of their COBRA premiums with employers paying the remaining 65 percent, for nine months.

Unemployment compensation. Although unemployment compensation is typically taxable income, the 2009 tax year provides a respite from taxability for up to $2,400 of unemployment income. However, the exclusion from taxable income for unemployment compensation is only available for 2009, and will expire at the end of the year unless Congress acts to extend this benefit.

Motor vehicle sales tax deduction. The deduction for sales tax paid on the purchase a new motor vehicle is available for vehicles purchased between February 17, 2009 and December 31, 2009. Taxpayers can deduct state and local sales and use taxes paid on the first $49,500 of the purchase price of the vehicle. The deduction can be taken whether or not the taxpayer itemizes deductions. However, if you deduct state and local general sales taxes as an itemized deduction, you cannot “double dip” and take the deduction for new car sales taxes.

AMT exemption amounts. For 2009, the AMT exemption amounts increased to $46,700 for individuals and $70,950 for married taxpayers filing jointly. However, these exemption amounts will decrease in 2010 to $33,750 for single taxpayers and $45,000 married taxpayers filing jointly.

Our office will continue to monitor the situation in Washington to be ready to advise you if any of the provisions set to expire at the end of 2009 are extended. With Congress busy with health care reform, the likelihood is that the fate of most if not all of the expiring provisions will remain uncertain for some time. In fact, some in Congress have been quietly discussing the possibility of not passing any extension until next year, and then making it retroactive to January 1. Stay tuned.

FAQ: What’s new in back-to-school tax savings?

Many back-to-school college students and their families are facing the toughest time in years, in meeting the costs of higher education due to the recent economic downturn. In an attempt to face this challenge, Congress recently passed some tax relief for college students and families that, together with scholarships, loans and work-study grants, can provide invaluable lifelines this year. The tax relief is twofold: the new American Opportunity Tax Credit and more liberal withdrawal rules for Section 529 plans to cover technology needs. Both tax provisions are temporary - for 2009 and 2010 only - but likely will be extended in some form if the need continues.

American Opportunity Tax Credit

For 2009 and 2010, Congress has enhanced the Hope Scholarship Credit and has renamed it the American Opportunity Tax Credit. The 2009 Recovery Act makes the credit available to more families than the Hope Credit. Not only can the American Opportunity Tax Credit be used for the first two years of post-secondary education, but it is available for the third and fourth years of college as well. Further, the credit can be taken for more expenses, such as text books and course materials. And, although the credit phases out as adjusted gross income rises, the income phase out range has been increased. Additionally, 40 percent of the credit is refundable.

ABCs of the AOTC: The American Opportunity Tax Credit (AOTC) is available for 2009 and 2010 up to a maximum of $2,500 per eligible student per year (100 percent of the first $2,000 eligible expenses plus 25 percent of the next $2,000 eligible expenses). The credit phases-out at higher income levels, making the credit available to more families as well. For single taxpayers, the phase out range is increased to $80,000 - $90,000 AGI, and for married joint filers the credit phases out when AGI falls between $160,000 - $180,000.

You cannot claim the above-the-line higher education expense deduction (of up to $4,000) in the same year that you claim the AOTC or Lifetime Learning Credit; you must choose among these tax benefits. If you have a choice between the AOTC and the Lifetime Learning Credit, or the higher education expense deduction, you may find that the AOTC garners you more tax savings. Although the credit will usually result in more tax savings, you should calculate the effect of the AOTC, Lifetime Learning Credit and higher education expense deduction on the tax return to see which achieves the greatest tax savings. Remember, also, in “doing the math” that the tax benefits are based on calendar tax years and not school academic years.

Technology expenses and Section 529 Plans

New for 2009 (and 2010) parents and students can take tax-free withdrawals from their prepaid tuition plans (”529 plans”) to buy computers and computer-related equipment for college. The American Recovery and Reinvestment Act of 2009 (2009 Recovery Act) added computers, computer equipment, technology, internet access and “related services” to the list of qualified higher education expenses that can be paid for with tax-free 529 withdrawals. However, as with the AOTC, this expansion is temporary and applies only for 2009 and 2010 … unless Congress extends this new tax break.

Section 529 plan coverage. Qualified tuition programs, more commonly referred to as 529 plans, allow you to either prepay or contribute to an account set up for paying a student’s qualified education expenses at eligible educational institutions. When withdrawals are taken to pay for qualifying education expenses they are tax-free. Qualifying expenses include tuition, fees, books, supplies and equipment required for enrollment or attendance of the student at an eligible educational institution (and expenses related to special needs services for special needs students). They also include expenses for room and board as long as the student is enrolled in a degree or certificate program at least part time. Now, thanks to the 2009 Recovery Act, they also include expenses for computers and computer-related equipment and services.

The types of computer and related technology and equipment that can be purchased with tax-fee withdrawals are fairly expansive. Expenses include those made to buy: computers, computer software, peripheral equipment, fiber optic cables related to computer use, as well as internet access and related services. The computer and/or computer-related must be used by the student or family members during enrollment in college (or other post-secondary institution).

Exceptions. Tax-free withdrawals can not be taken for computer software designed for games, sports or hobbies, unless the software is “predominantly educational in nature.”

Additionally, while the tax law allows you to combine the tax benefits of a 529 plan with one of the education credits or deductions, you cannot “double dip.” That is, the expenses you use to compute the AOTC (or Lifetime Learning Credit) cannot also be included as a qualified higher education expense for purposes of determining your tax exclusion for 529 plan withdrawals.

Remember also that states have their own rules regarding education benefits, such as 529 plans and withdrawals. These must be considered as part of your education tax savings strategy.

Please contact us to discuss the higher education tax saving strategies that can best benefit your particular situation.

FAQ: What is the “Cash for Clunkers” program?

Recently, Congress created the “cash for clunkers” program, a temporary federal government program that can help taxpayers save $3,500 or $4,500 off the price of a new car or truck. Under the Consumer Assistance to Recycle and Save Act of 2009 (appropriately, the CARS Act), the “cash-for-clunkers” program enables individuals who trade in an old “gas guzzler” to qualify for a voucher toward the purchase of a new fuel-efficient vehicle. Importantly, the value of the voucher is not treated as income to you!

You can purchase or lease a new vehicle and be eligible for a voucher (the minimum lease for a vehicle is five years). However, used vehicles are not eligible for the voucher. Both domestic and foreign-made vehicles qualify if they meet the CARS Act standards.

The cash for clunkers program is temporary. The program was scheduled to expire after November 1, 2009 or when $1 billion, which Congress appropriated for the program, was depleted. Consumer demand was so great that the funds were nearly exhausted by the end of July. On July 31, the House allocated another $2 billion to the program due to its popularity. The Senate is expected to also approve additional funding.

Under the CARS Act, motor vehicles are divided into four groups: Passenger automobiles and three categories of trucks. Category 1 trucks are non-passenger automobiles and include SUVs and small/medium pickup trucks and small/medium vans. A category 2 truck is, in most cases, a large pickup truck or van based on the length of the wheelbase (more than 115 inches for pickup trucks and more than 124 inches for vans). A category 3 truck is a work truck and is rated between 8,500 and 10,000 pounds gross vehicle weight. This category includes very large pickup trucks (cargo beds 72 inches or more in length) and very large cargo vans.

Trade-in vehicles

Your trade-in vehicle must satisfy certain basic criteria. For passenger cars, the vehicle must:

• Have been manufactured less than 25 years before the trade-in date;
• Have a combined city/highway fuel economy of 18 miles per gallon or less;
• Be in drivable condition; and
• Be continuously insured and registered to the same owner for the full year preceding the trade-in.

Additionally, the new vehicle must have a manufacturer’s suggested retail price of not more than $45,000. The criteria for trucks, including SUVS, are similar with differences for fuel economy. The rules for work trucks are different, and discussed below.

Fuel efficiency standards

The new vehicle must also meet certain fuel-efficiency standards. The combined fuel efficiency standards are:

Passenger automobiles. For passenger automobiles, the new vehicle must have a combined fuel economy value of at least 22 mpg.

Category 1 trucks. The combined fuel economy value for a new category 1 truck is 18 mpg or more.

Category 2 trucks. For category 2 trucks, the new vehicle must have a combined fuel economy of at least 15 mpg.

Category 3 (work) trucks. Category 3 (work) trucks have no minimum fuel economy requirements.

Voucher amounts

The amount of the voucher (which ranges from $3,500 to $4,500) depends on the difference between the fuel economy of the trade-in vehicle and the fuel economy of the new vehicle. If the new passenger vehicle has a combined fuel economy that is at least 4 mpg but less than 10 mpg higher than the trade-in vehicle, the credit is $3,500. If the new passenger car has a combined fuel economy value that is at least 10 mpg higher than the trade-in vehicle, the credit is $4,500.

The value of the voucher for the purchase or lease of a category 1 or 2 truck generally depends on the difference between the combined fuel economy of the vehicle that is traded in and that of the new vehicle that is purchased or leased. If the new vehicle is a category 1 truck that has a combined fuel economy value that is at least 2 mpg but less than 5 mpg higher than the traded-in vehicle, the credit is $3,500. If the new category 1 truck has a combined fuel economy value that is at least 5 mpg higher than the traded-in vehicle, the credit is $4,500.

If both the new vehicle and the traded-in vehicle are category 2 trucks and the combined fuel economy value of the new vehicle is at least 1 mpg but less than 2 mpg higher than the combined fuel economy value of the traded in vehicle, the credit is $3,500. If both the new vehicle and the traded-in vehicle are category 2 trucks and the combined fuel economy of the new vehicle is at least 2 mpg higher than that of the traded-in vehicle, the credit is $4,500.

Work trucks. Special rules apply for work trucks. A $3,500 credit applies to the purchase or lease of a category 2 truck if the trade-in vehicle is a category 3 (work) truck that was manufactured not later than model year 2001, but not earlier than 25 years before the date of the trade in

You will not directly receive a paper voucher. Instead, dealers will apply the amount of the voucher to the purchase/lease price of the new vehicle. Dealers will later be reimbursed by the National Highway Traffic Safety Administration (NHTSA). Reimbursements will occur roughly 10 days after the sale or lease of the new vehicle, the NHTSA explained.

The vouchers are not treated as income to consumers but are income to auto/truck dealers, according to the NHTSA. The NHTSA often refers to the vouchers as “credits,” which may cause some confusion leading consumers to equate them with tax credits. The vouchers are not tax credits. The benefit is a reduction in purchase price.

If you have any questions regarding the “cash for clunkers” program, please call our office.

FAQ: How much proof is enough, when contributing used clothing to charity?

You may have done some spring cleaning and found that you have a lot of clothes that you no longer wear or want, and would like to donate to charity. Used clothing that you want to donate to charity and take a charitable deduction for, however, is subject to a few rules and requirements.

Under IRS guidelines, clothing, furniture, and other household items must be in good used condition or better, to be deductible. Shirts with stains or pants with frayed hems just won’t cut it. Furthermore, if the item(s) of used clothing are not in good used condition or better, and you wish to deduct more than $500 for a single piece of clothing, the IRS requires a professional appraisal.

For donations of less than $250, you must obtain a receipt from the charity, reflecting the donor’s name, date and location of the contribution, and a reasonably detailed description of the donation. It is your responsibility to obtain this written acknowledgement of your donation.

Used clothing contributions worth more than $500

If you are deducting more than $500 with respect to one piece of used clothing you donate, you must file Form 8283, Noncash Charitable Contributions, with the IRS. For donated items of used clothing worth more than $500 each, you must attach a qualified appraisal report is to your tax return. The Form 8283 asks you to include information such as the date you acquired the item(s) and how you acquired the item(s) (for example, were the clothes a holiday gift or did you buy the items at the store).

Determining the fair market value of used clothing

You may also need to include the method you used to determine the value of the used clothing. According to the IRS, the valuation of used clothing does not necessarily lend itself to the use of fixed formulas or methods. Typically, the value of used clothing that you donate, is going to be much less than you when first paid for the item. A rule of thumb, is that for items such as used clothing, fair market value is generally the price at which buyers of used items pay for used clothing in consignment or thrift stores, such as the Salvation Army.

To substantiate your deduction, ask for a receipt from the donor that attests to the fact that the clothing you donated with in good, used condition, or better. Moreover, you may want to take pictures of the clothing.

If you need have questions about valuing and substantiating your charitable donations, please contact our office.

FAQ: What are the tax consequences of putting my child on the payroll?

With summer approaching and the end of the school year, you may be considering hiring your children to work in your business. Whether you run a restaurant, shop or office, hiring your children has certain tax implications. Putting your child on your payroll is a smart move that can save you money in taxes … and get your child involved in the family business!

Deductible business expense

The wages you pay your child are tax deductible on your income tax return (or that of your business) as business expenses. As a general rule, a business can claim a tax deduction for the salary, wages, commissions, bonuses, and other compensation it pays to its employees. Don’t forget a W-2 for your child at the end of the year, either.

How much is too much?

If you are putting your child on the payroll, be careful how much you pay him or her in wages since the IRS requires that you child be paid a reasonable amount for the labor provided. Generally, the IRS does not challenge the amount of the compensation as unreasonable unless, among other things, the employee has a personal relationship with the employer. Translation: if your daughter is bussing tables and sweeping floors, paying her $25 per hour will likely be deemed “excessive” by the IRS. The IRS in these cases is not only concerned about “no show” jobs but also those paid at an unreasonable salary level. Proof, in the form of time logs and comparable salary levels in the industry, will go a long way in helping keep the deduction should the IRS audit this aspect of your business.

Standard deduction

Due to the standard deduction for 2009, the first $5,700 of your child’s wages would not be taxed at all. Your child, however, can not also take a personal exemption deduction if you are claiming her as a dependent. For example, if you file a Schedule C, Profit or Loss From Business, the $5,700 you pay your child, which is non-taxable to her, reduces your Schedule C income by that amount. If you are in the 35 percent tax bracket, the deduction will save you $1,881 in federal income taxes and at no tax cost to your child.

Comment.  The actual computation of a child’s standard deduction is filled with a number of limitations so that investment income cannot be unnecessarily sheltered by a child. For tax years beginning in 2009, the standard deduction for a dependent may not exceed the greater of $950, or the sum of $300 and the dependent’s earned income (up to the regular standard deduction amount). The threshold for the application of the kiddie tax is twice the amount of the limited standard deduction for a dependent, or $1,900. Earned income is not subject to the kiddie tax.

Limited withholding responsibilities for Social Security or Medicare taxes

The wages you pay your child (as long as they are under the age of 18) may not be subject to Social Security or Medicare taxes, or state disability/unemployment taxes. This exemption is specifically provided for in the Internal Revenue Code. “Employment” for purposes of Social Security and Medicare taxes (FICA) generally excludes services performed by a child under the age of 18 in the employ of his or her parent if the parent’s trade or business is a sole proprietorship or a partnership in which each partner is a parent of the child.

However, the wages you pay your child for services are subject to income tax withholding, as well as social security, Medicare, and FUTA taxes if your business is:

• A corporation, even if it is controlled by you or your spouse;
• A partnership, unless each parent is a partner;
• A partnership, even if the child’s spouse is a partner;
• An estate, even if it is the estate of a deceased parent.

Moreover, children under the age of 21 are exempt from Federal Unemployment Tax (FUTA), whether or not in a trade or business.. But remember, you will still need to withhold federal income tax and file a W-2 form for each of your children you employ.

IRA contribution

You may be able to shelter an additional 15 percent of wages (up to $5,000) by contributing to an IRA for your child. A contribution to a regular IRA is deducted from income. This strategy works even better with a Roth IRA. Although contributions to a Roth IRA are not deductible, the wage income allows your child to make contributions. Those amounts grow tax-free as long as your child keeps the account.

What about the “kiddie tax?”

If you are worried about the effect of the dreaded “kiddie tax,” relax. The “kiddie tax” does not apply to your child’s “earned” income - which is any income your child earns from working, as opposed to “unearned” investment-type income. Therefore, your child’s earned income from working for you will not be taxed at your top marginal tax rate.

Putting your children on the payroll can be a good way to reduce your tax liability and increase your family’s net worth. For more information about how you and your family can benefit from this tax saving idea, contact our office.

FAQ: Can the first-time homebuyer credit be claimed in advance of a purchase?

No. Many individuals may be considering buying a new home in 2009 as home prices continue to drop in many areas across the country. They may also be wondering if they can claim the $8,000 first-time homebuyer tax credit before actually purchasing the home. Although this might generate a refund you could use as a down payment, the IRS will not allow you to claim the credit in advance of a purchase.

Homebuyer credit

The first-time homebuyer credit is a temporary tax incentive. As its name implies, it is targeted to first-time homebuyers.

Congress created the first-time homebuyer credit in 2008. At that time, the maximum credit was $7,500 and it had to be repaid. The credit was more like a loan than a true credit even though repayment was interest-free. In the American Recovery and Reinvestment Act of 2009, Congress increased the maximum credit to $8,000. Congress also removed the repayment requirement for homes purchased between January 1, 2009 and December 1, 2009. With repayment no longer required, more taxpayers are expected to take advantage of the credit.

No advance claims

You cannot claim the first-time homebuyer credit in anticipation of a home purchase that has yet to happen. Taxpayers qualify for the credit when they finalize the purchase of their home, which for most purchasers occurs at the time of closing, the IRS explained.

Individuals constructing a new home may be eligible for the first-time homebuyer credit. Like purchasers of existing homes, they cannot claim the credit in advance. For new construction, the IRS explained that the purchase date is the first date that the taxpayer occupies the home.

Taxpayers claim the credit on Form 5405, First-Time Homebuyer Credit, which clearly asks for “date acquired” (past tense). A similar credit, the District of Columbia homebuyer credit, requires an actual purchase. Effectively, such language and the IRS’s decision to prohibit the credit to be used in anticipation of a purchase, precludes taxpayers from using a refund from the credit as a down payment.

Amended returns

Individuals may claim the $8,000 credit for 2009 purchases on their 2008 or 2009 returns. If you filed your 2008 return without claiming the credit, you may want to consider filing an amended return. Alternatively, you can wait and claim the credit on your 2009 return, which you will file in 2010.

Other criteria

Not everyone can claim the first-time homebuyer credit. There are income limitations. Additionally, a taxpayer cannot have owned and used a home as his or her principal residence in the past three years. However, there are some exceptions. The credit also may be allocated among unmarried taxpayers. Domestic partners and family members who purchase a home together may generally allocate the credit using any reasonable method.

If you are purchasing a home in 2009, please contact our office. You may be eligible for this valuable tax break.

FAQ: How does the new sales tax deduction for vehicle purchases work?

Non-itemizers and itemizers alike who purchase a new vehicle in 2009 may be eligible for a new (but temporary) above-the-line deduction for the state and local sales taxes or excise taxes paid on the purchase. This temporary tax break is part of the American Recovery and Reinvestment Tax Act of 2009 (2009 Recovery Act).

General rules

The motor vehicle sales tax deduction is treated as an increase in the standard deduction (or as a “bonus” standard deduction for those taking itemized deductions). The deduction for state sales and excise taxes paid on a new motor vehicle is allowed for purchases made between February 17, 2009 and before January 1, 2010. The amount of the deduction allowable cannot exceed the part of the state sales or excise tax imposed on the first $49,500 of the vehicle’s purchase price. Eligible taxpayers may claim the deduction in determining their regular income tax and alternative minimum tax (AMT) liability.

Traditionally, one reason to sell your trade-in vehicle to the dealer from whom you are purchasing your new one is that state sales tax laws generally allow sales tax to be paid only on the net purchase price (that is, less the trade-in). While it remains more advantageous to avoid sales tax rather than take a deduction for it, this difference may be one more reason to donate your trade-in to charity. We can crunch the numbers to help you make a final decision.

However, the deduction begins to phase out for individuals with adjusted gross income (AGI) exceeding $125,000 ($250,000 for joint filers) and is completely phased out when an individual’s AGI exceeds $135,000 ($260,000 for joint filers). Additionally, the deduction can not be claimed for sales taxes paid on leased vehicles.

Vehicle limits

The deduction is only allowed for “qualified motor vehicles.” For purposes of the deduction, a “qualified motor vehicle” is any newly purchased vehicle, including cars, SUVs, light trucks, or motorcycles that are first used by the taxpayer. Used cars are not eligible for the deduction. But, both domestic and foreign-made vehicles qualify. Generally, the qualifying vehicles cannot weigh more than 8,500 gross pounds.

Example. You have purchased a new car that qualifies for the vehicle sales tax deduction. Your AGI is less than $125,000, so you qualify for the full amount of the deduction. The car cost $40,000 and the sales tax paid was 4 percent. Your above-the-line deduction would be $1,600, which if you are in the 25 percent income tax bracket is $400 more in your pocket because of your vehicle purchase.

FAQ: What if I owe taxes and can’t pay the full amount?

If you have completed your tax return and you owe more money than you can afford to pay in full, do not worry, you have many options. While it is in your best interest to pay off as much of your tax liability as you can, there are many payment options you can utilize to help pay off your outstanding debt to Uncle Sam. This article discusses a few of your payment options.

Pay Uncle Sam as much as you can

First and foremost, if you cannot pay the full amount of taxes due, you should nevertheless file your return by the April 15 deadline. Moreover, you should send in as much money as you can with your return. The IRS assesses failure-to-file penalties so you should file your return despite being unable to pay the full amount with the return. As such, it’s to your benefit to file your return by its due date and pay off any outstanding balance as soon as you can in order to minimize interest and penalties.

Payment options

If you are not able to pay the full amount of tax you owe, you have options. While you can obtain an automatic six-month extension of time to file, the IRS will still assess interest on the outstanding unpaid tax liability. To do so, you must file Form 4868, Application for Automatic Extension of Time To File U.S. Income Tax Return, by the due date for filing your calendar year return (typically April 15) or fiscal year return. However, an extension of time to file is not an extension of the time to pay your taxes. Penalties and interest continue to accrue during the extension.

Second, consider paying some or all of your tax liability by credit card or obtaining a cash advance on your credit card. The interest rate your credit card or bank charges (plus applicable fees) may be lower than the total amount of interest and penalties imposed by the IRS under the Tax Code.

You may also be eligible to take advantage of the IRS’s monthly installment agreement option. This option allows eligible taxpayers to pay off their tax bill over a period of time - in monthly installments - to the IRS. However, if you have entered into an installment agreement during the preceding 5 years you cannot use this option. Additionally, even while you are making payments through an installment agreement, penalties and interest continue on the unpaid portion of that debt. To request an installment plan, you can use Form 9465, Request For Installment Agreement. Or, you can use the Online Payment Agreement (OPA) application.

There are many options for paying off your tax debt. Our office can discuss the payment options that will work best in your specific circumstances. Please don’t hesitate to call our office with questions.