Flam Financial Blog

A Belated Farewell: 1099 Reporting Mandate is Eliminated

2011-05-16T15:30:00.000-07:00

I could come up with a number of excuses how I missed this story... On April 14th, 2011 President Obama signed H.R. 4, the “Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011," putting an end to the pending requirement mandating all businesses 1099 any other business (Sole Prop, LLC, Corporation, etc.) they purchase goods and/or services from. You may recall our initial article about Section 9006 of H.R. 3590 where we outlined the mandate that many believed added undue financial burden to businesses throughout the country through extra data collection and accounting procedures.

Well I am happy to report that there is no more need to be alarmed, since, for now, this requirement has been officially repealed.

To learn more about the repeal and H.R. 4, please visit the links below:
White House Press Release on H.R. 4
Article from Forbes shortly after Congress agreed on the repeal

We're Back! Top-Three News Stories I Missed Because of Tax Season

2011-04-29T12:25:00.000-07:00

It has been a very busy tax season, but I am happy to report that our blog is back and I'll be posting away. After sifting through the hundreds of Google Alerts (and thousands of news stories held within) in my inbox, I am ready to unveil my top news stories I neglected during tax season.

#3: Justice Dept. Goes After HSBC To Name Possible US Tax-Dodgers In India
It appears as though the Justice Department is ready to move on from UBS and start courting HSBC, who is apparently helping many US Citizens/Residents invest money in India and take advantage of they very high interest rates. That said, it does appear as though the IRS may start focusing more of their energy on higher bank account balances (see this story). The way the law is currently written, the Department of Treasury wants anyone with more than $10k invested abroad to be reporting their accounts annually via the TDF 90-22.1.

#2: AICPA's Call for AMT Repeal, Simplification Strikes Chord With Lawmakers
It seems like every year, I get to sit down and have that "fun" conversation with more and more clients about the Alternative Minimum Tax and how their deductions will provide them with no benefit. And while we try to tell our clients stories about how someday congress will get it right, we never see any progress. Well, the AICPA is lobbying hard, and they may have a few more people on board this year. Are we expecting much to come from this? Not really. But we can only hope some change is on the horizon.

#1: IRS Commissioner Seeks Changes in Annual Tax Filing Process
Are we getting closer to pre-filled 1040's? Possibly. Commissioner Shulman is trying hard provide taxpayers with up-front information so they can prepare their tax returns knowing that they have covered all of the bases. While Commissioner Shulman feels this is a step in the right direction for lowering the massive amounts of letter audits sent every year, many others believe this may actually increase the tax gap even further. While taxpayers are required to report ALL income earned during the year, many people often report income because they don't want to be caught forgetting an item the IRS may already know about. So what is going to happen when taxpayers know from the beginning how much income the IRS is expecting them to report?

The IRS Announces Processing Date For Delayed Returns

2011-01-21T14:53:00.000-08:00

You can finally mark the date on your calendar – the IRS has announced that they will begin processing tax returns, that were delayed to accommodate last minute changes to the 2010 tax law, on February 14th. This comes as a relief to many people who anticipated they may not be able to file early this year.

To find out if your filing will be delayed until the 14th, please read this article.

Why You Might Not Be Able To File Your Taxes Early This Year

2010-12-30T09:38:00.000-08:00

After months of wheel-spinning and debates over the future of the Bush Tax Cuts, we finally have certainty regarding the tax code for the next two years. Unfortunately for the IRS, these decisions came in a little later than expected. As a result, it doesn't look like the IRS will be ready to start accepting tax returns for a significant percentage of taxpayers until mid-February at best.

The taxpayers primarily affected include those who:

Itemize their deductions through a Schedule A. This includes anyone who would like to write off Mortgage Interest, Medical Expenses, Charitable Contributions, etc.
Have Casualty or Theft Losses to deduct through Form 4684
Take a tuition and fees deduction through Form 8917
Take a deduction for classroom materials purchased (only applies to qualifying educators)
Claim the District of Columbia First-Time Homebuyer Credit

Additionally, a smaller percentage of taxpayers will be affected if they need to use any of the following forms:

Form 3800, General Business Credit
Form 5405, First-Time Homebuyer Credit and Repayment of the Credit
Form 6478, Alcohol and Cellulosic Biofuel Fuels Credit
Form 8834, Qualified Plug-In Electric and Electric Vehicle Credit
Form 8910, Alternative Motor Vehicle Credit
Form 8936, Qualified Plug-In Electric DriveMotor Vehicle Credit

It has been estimated that roughly 1/3 of taxpayers itemize deductions. However, it is unlikely that the majority of taxpayers falling in the aforementioned categories will be ready to file early regardless, as most of the documentation required to file does not arrive until February.

It's Official: The "Middle-Class Tax Cuts" Have Been Inked In

2010-12-17T15:47:00.000-08:00

With a few pen strokes, President Obama has signed the $858 billion tax bill. Most of the bills provisions will take effect for the next two years, while some are set to expire at the end of 2011. Will it further stimulate the economy? Only time will tell.

Here's a video from today's signing:

Bush...errrr....Obama Tax Cuts: Whats New and How Will They Affect You?

2010-12-08T12:57:00.000-08:00

While you will be hard-pressed to find anyone who agrees entirely with the extension and additions to the Bush-Era Tax Cuts (or Middle Class Tax Cuts as the White House has been calling them), it looks like we finally have some certainty moving into 2011. Will we see a decrease in unemployment and significant economic growth as a result of the cuts? That is to be determined.

President Obama held a press conference yesterday to address the extension of the tax cuts:

So now that it is almost certain that the tax cuts are coming back, what will that actually mean for taxpayers? We have included a list below highlighting the major additions coming out:

1. Welcome Back Estate Tax
The Estate Tax is back, following its one-year vacation. While heirs around the country feared that the estate tax could return to affect estates exceeding $1 million with rates of 55%, a very different, and somewhat unexpected, situation has arisen. It now appears that the exemption will increase to $5 million, with a mere 35% tax placed on estates in excess of the exemption.

2. The Payroll Tax Holiday
The employee portion of social security taxes is set to decrease by around 30% for the next year (from 6.2% to 4.2%). Working individuals should expect significant savings on their payroll taxes, capping out at around $2,136 (2% of $106,800, the income limit for social security deductions). This could be very significant, especially in comparison to the $400 per person Making Work Pay Credit from'09 and '10, and the Stimulus Credit of $600 per person from '08 (although the latter was also awarded for children and non-working spouses).

3. Earned Income Tax Credit (EITC) Expansion
The EITC has been expanded to provide, on average, $600 in additional assistance to families with 3 or more children. The expansion is set to last for the next two years.

Aside from whats new, many items have been extended as is. Theses include:

The Child Tax Credit: Currently set to remain at a maximum of $1,000 per child.
American Opportunity Tax Credit: Students should still be able to receive a maximum of $2,500 for their tuition, fees, books and supplies as long as the expenses were incurred during the first four years of post-secondary school.
The Child Tax Credit: Currently set to remain at a maximum of $1,000 per child.
Capital Gains: Capital gain rates should remain consistent with 2010. That means long-term rates will likely max out at 15%.

The Small Business Health Care Tax Credit: What You Need to Know

2010-12-02T13:12:00.000-08:00

Earlier today, the IRS released the Form 8941 for qualifying employers to use when claiming the Small Business Health Care Tax Credit. The greatest beneficiaries of this credit will be companies employing 10 or fewer full-time equivalent employees earning an average of $25,000 or less (and pay at least half of the premiums for their employees' health insurance coverage). This credit is not indexed for the cost of living throughout the US, so it is likely that you won't see very many Los Angeles based employers receiving the maximum credit. The credit is phased out for companies employing 25 or more full-time equivalent employees earning an average of $50,000 or more.

The Instructions for Form 8941 were released today as well, and provide thorough guidance on qualifications for the credit and how to fill out Form 8941. Below are some points you shouldn't overlook:

Owners are Excluded: Owners of a sole proprietorship, partners in a partnership, shareholders who own more than 5% of outstanding stock or voting power in a C-Corp, shareholders who own more than 2% of an S-Corp, and people owning 5% of the capital profits interest in a non-corporation business are excluded from the credit. Their hours and wages are not averaged in, nor are their premiums considered.
Seasonal Employees: Bringing on some extra help at Christmas time? Well, those employees who work for you 120 or fewer days during a tax year are not included when figuring out average annual wages or hours. Premiums paid on their behalf may still be included when figuring out your total credit.
There is a Difference Between Employees and Full-Time Equivalent Employees: You will need to take out a calculator to figure out how many Full-Time Equivalent Employees you have. Start by adding up the total number of hours for all qualifying employees (see the Instructions for Form 8941 for more details on figure out that number). Next, divide the total hours of service by 2,080. Finally, round down to the next lowest whole number. Yes, round down. However, if the result is less than 1, round up to 1. 2,080 hours a year is the equivalent of one employee working exactly 40 hours a week. Why is this significant? See below.
Beware of Overtime: As noted above, if all of your employees received compensation for exactly 40 hours a week you would most likely end your calculation with a whole number. However, lets pretend you have 10 employees who each average 50 hours per week. According to the IRS, you would have 12 full-time equivalent employees. On the same note, if your same 10 employees each averaged 30 hours per week, you'd have 7 full-time equivalent employees.
Only Premiums Paid for Employees Count: Are you being generous and paying extra for your employees who wish to include their family under their coverage? While that is very nice of you, only amounts paid for your individual employees can be used for figuring out your credit.
High-End Insurance Options Don't Necessarily Lead to Better Credits: The IRS has kindly included a table in the Instructions for Form 8941 that indicates average coverage by state. If your premiums paid per employee exceed the state averages, your credit will be reduced.

To learn more about the Credit for Small Employer Health Insurance, please visit the links below:
Notice 2010-82
Form 8941
Instructions for Form 8941

2010 Filing Season Statistics

2010-11-11T13:59:00.000-08:00

Yesterday, the IRS released statistics from the 2010 filing season. What shouldn't come as a surprise is that the percentage of federal returns e-filed continues to rise. This is largely due to an increase of taxpayers who self-prepared their returns this year. At the same time, the number of returns filed dropped by 2 million from '09. Additionally, the percentage of filers who received a refund dropped by only half a percent.

Here are the highlights from the report:

2010 FILING SEASON STATISTICS

Cumulative through the weeks ending 11/06/09 and 11/05/10

Individual Income Tax Returns
2009

2010

% Change

Total Receipts
143,529,000

141,536,000

-1.4%

Total Processed
143,079,000

141,536,000

-1.4%

E-filing Receipts:

TOTAL
95,478,000

98,740,000

3.4%

Tax Professionals
63,285,000

63,893,000

1.0%

Self-prepared
32,193,000

34,847,000

8.2%

Web Usage:

Visits to IRS.gov
275,308,302

281,765,152

2.3%

Total Refunds:

Number
111,163,000

108,923,000

-2.0%

Amount
$315.290
Billion
$326.125
Billion
3.4%

Average refund
$2,836

$2,994

5.6%

Direct Deposit Refunds:

Number
72,982,000

74,460,000

2.0%

Amount
$220.250
Billion
$237.444
Billion
7.8%

Average refund
$3,018

$3,189

5.7%

To view the full report, click here.

Where Do We Currently Stand with the AMT Patch? Bush Tax Cuts?

2010-11-10T14:18:00.000-08:00

Taxpayers are getting nervous. The IRS is getting nervous. Lawmakers are...working on it. With so many questions still lingering regarding the fate of AMT and the Bush tax cuts following the midterm elections, uncertainty is clouding many taxpayers' year-end tax planning efforts.

So where do we currently stand with AMT? This article from The Hill sheds some light on the widely expected patch that will yet again surface. And what about the Bush Tax Cuts? Forbes has provided some potential outcomes along with their likelihood in this recent article.

In the end, it is hard to believe that any significant changes will take place between now and December 31st. Rather, we will likely see a year-end scramble to preserve the status quo and table discussions about their future until 2011, when a similar chain of events will likely repeat itself.

A Closer Look at the 1099 Reporting Requirements Coming in 2012

2010-11-08T14:22:00.000-08:00

It wasn’t long after the passing of the Patient Protection and Affordable Care Act (H.R. 3590) that people were alerted to the adjustments made to the business expense reporting requirements taking effect in 2012. These changes, which were thought to have been introduced to help fund the health reform bill, are a game-changer in the 1099 reporting world which had mostly been reserved for reporting payments to independent contractors. Simply stated, businesses (sole proprietors, partnerships, corporations, etc.) will now be required to issue a 1099 for all goods and services purchased with a cumulative total of $600 or more received from ANY, non tax-exempt business.

Section 9006 of H.R. 3590, Expansion of Information Reporting Requirements, was designed to amend Section 6041 of the Internal Revenue Code. For your convenience, we have indicated the pertinent adjustments in bold below:

Sec. 6041. Information at source

(a) Payments of $600 or more [Effective for payments made after December 31, 2011]

All persons [Including any corporation that is not an organization exempt from tax under section 501(a)] engaged in a trade or business and making payment in the course of such trade or business to another person [Including any corporation that is not an organization exempt from tax under section 501(a)], of rent, salaries, wages, amounts in consideration for property, premiums, annuities, compensations, remunerations, emoluments, or other gross proceeds, fixed or determinable gains, profits, and income (other than payments to which section 6042(a)(1), 6044(a)(1), 6047(e), 6049(a), or 6050N(a) applies, and other than payments with respect to which a statement is required under the authority of section 6042(a)(2), 6044(a)(2), or 6045), or $600 or more in any taxable year, or, in the case of such payments made by the United States, the officers or employees of the United States having information as to such payments and required to make returns in regard thereto by the regulations hereinafter provided for, shall render a true and accurate return to the Secretary, under such regulations and in such form and manner and to such extent as may be prescribed by the Secretary, setting forth the amount of such gross proceeds, gains, profits, and income, and the name and address of the recipient of such payment.

What does this all mean?
In previous years, businesses have always had the luxury of deducting goods and services purchased from a corporation without having to issue a 1099. However, these recently introduced changes could now add a few headaches from an information collection and document generation standpoint. Imagine the additional time it will now take businesses to collect tax ID numbers from their vendors and issue 1099’s. That said, businesses who maintain organized books throughout the year will be in better shape, but will still be faced with an increased workload.

Where do we stand today with IRC Section 6041?
Since it was initially uncovered, Section 9006 has been the subject of scrutiny from business owners, congressmen, senators and, most recently, President Obama. In fact, during his November 3rd press conference, President Obama indicated his willingness to discuss the repeal of this provision due to its potentially adverse effects on small businesses. H.R. 5141, authored by Congressman Dan Lungren, was introduced on April 26th to repeal the extension of IRC 6041 to include payments made to corporations (Senator Mike Johanns introduced a similar bill in July, S. 3578).

If Section 6041 remains undisturbed, there has been an effort made to soften the potential burden placed on businesses. The IRS has proposed regulations that would exempt credit card transactions from this reporting requirement. Additionally, the IRS is considering adjustments to reporting deadlines.

If you’d like to learn more about H.R. 3590, and the current attempts to repeal its information reporting requirement, please follow any of the links below:
H.R. 3590: The Patient Protection and Affordable Care Act
IRC Sec. 6041: Information at Source
S. 3578: Small Business Paperwork Mandate Elimination Act
H.R. 5141: Small Business Paperwork Mandate Elimination Act
IRS Bulletin 2010-29: Information Reporting Under the Amendments to Section 6041 for Payments to Corporations and Payments of Gross Proceeds and With Respect to Property

The IRS May Take a Closer Look at Home Mortgage Interest Deductions

2009-09-02T12:38:00.000-07:00

A July 2009 report on Home Mortgage Interest Deductions by the Government Accountability Office has received a lot of publicity recently. The report highlights the tremendous amount of confusion on how to appropriately report Mortgage Interest. And many people speculate that the IRS will soon pay more attention to how people report their Home Mortgage Interest.

Many people fear that the recently unemployed will be the first targets of the IRS’s more focused investigations. This is because the IRS would likely target individuals who are paying more annually for their mortgages than their reported income would make appear reasonable. However, there may be another group of people whose deductions are questioned in the year to come.

IRS Publication 936 states:

You can deduct home mortgage interest if all the following conditions are met:
You file Form 1040 and itemize deductions on Schedule A (Form 1040)
You are legally liable for the loan
There is a true debtor-creditor relationship between you and the lender
The mortgage is a secured debt on a qualified home in which you have an ownership interest.

You cannot deduct interest you pay for someone else if you are not legally liable to pay it. Both you and the lender must intend that the loan be repaid.

If the IRS starts taking a closer look at mortgage interest, two things may happen:

Elderly people whose only income is from social security, but who are listed on the mortgage for a home that their children live in (and pay the mortgage for), may be audited due to speculation that they may have unreported income even if they do not deduct mortgage interest

Taxpayers who claim the mortgage interest deduction for a home but are not listed on the mortgage may be investigated by the IRS

United States Tax Court Opinion 2008-84
While IRS Publication 936 states that you cannot deduct mortgage interest unless you are legally liable for the loan, a recent US Tax Court case ruled in the favor of two taxpayers (in this example I will refer to them as petitioners) who were not on the title or the mortgage for their house.

The petitioners needed the help of their son to acquire their home and secure a mortgage because they had filed for Chapter 7 bankruptcy just two years prior. The petitioners lived in the home continuously, and they made all mortgage and real estate tax payments. The respondent (the IRS) pled that since the petitioners were not legally obligated to pay the mortgage and did not hold legal title on the property, they were not entitled to deduct the interest.

The key to validating the deduction was proving that the petitioners were equitable and beneficial owners of the property, exclusively enjoying the benefit and burden of the property.

Although the example above yielded a favorable outcome for taxpayer, it is very important to note that past positive results in tax court do not guarantee future success (nor can past negative results guarantee future failure). As stated in the initial lines of the ruling opinion, “the decision to be entered is not reviewable by any other court, and this opinion shall not be treated as precedent for any other case.” Every case is different, just as every court is different. So what works for one taxpayer may not work for another. Still, it may be reassuring to taxpayers who get caught up in future IRS investigations that there may be some hope.

For more information on home mortgage interest deductions, please see the resources below:
IRS Publication 936
US Tax Court Summary Opinion 2008-84
Government Accountability Office report on home interest deductions
Wall Street Journal article about the potential crackdown on taxpayers who “inaccurately” deduct their home mortgage interest

Is the White House Pulling the Emergency Break on Cash for Clunkers?

2009-07-30T18:44:00.000-07:00

Its official, Cash for Clunkers is a hit. Dealerships throughout the country are being inundated with prospective car buyers anxious to send their clunkers to the junkyard for up to $4,500 in government issued rebates. But with two months still left for the Car Allowance Rebate System (CARS), is the White House ready to pull the plug on the program?

The government has already issued $96 million of its $1 billion budget for the program in just one week, as a result of nearly 23,000 auto sales. That is not including the vast number of sales still waiting for approval. In fact, more than 250,000 sales may be waiting for approval if early estimates are correct, which alone could cost the government more than $1 billion.

If you would like to read the full AP article on the potential halt to CARS, click here. If you would like to learn more about CARS and other auto rebates, you can read our previous post here.

UPDATE: It looks like CARS may be safe for now. Learn more by reading this article from the NY Times.

Is There Change on the Horizon for Business Meal and Entertainment Tax Deductions?

2009-07-29T13:18:00.000-07:00

The business meal and entertainment tax deduction may soon change from an appetizer to a main course. U.S. Representative Neil Abercrombie (HI) has reintroduced a bill to the 111th Congress that aims to increase the business meal and entertainment tax deduction from 50% to 80%. Cosponsored by three U.S. Representatives, House Bill 3333 has been floating throughout congress in some capacity for several years. Most recently, Representative Abercrombie’s 2007 version of the bill (H.R 2648) died in the 110th Congress after being referred to the House Committee on Ways and Means. The bill has also been presented to the Senate during previous sessions, always suffering the same fate.

New Recipe
While H.R. 2648 and H.B. 3333 are virtually identical, the 2009 bill may be more palatable for the House Committee on Ways and Means than in previous sessions. For one, the bill has more support from the house than in previous years with the presence of two additional cosponsors (although, the Senate variation on the bill released in 2003 had seven cosponsors). Also, the economy is in a very different place than it was last time the bill was introduced.

The National Restaurant Association (NRA) has taken a strong position advocating for H.B. 3333. According to research conducted by the NRA, an increase in the business meal tax deduction to 80% would lead to $6 billion in additional restaurant sales and create an $18 billion increase to the overall economy (based on the estimate that every $1 million in restaurant sales creates 33 jobs).

Will Congress Send it Back?
The business meal and entertainment tax deduction was not always set at 50%. In fact, prior to 1983 taxpayers could deduct 100% of their meals. Faced with a growing national debt, congress lowered the deduction to 80%. In 1993, President Clinton proposed to make additional cuts to the deduction, lowering it to 50%. At the time, the belief was that such a cut in the deduction would pay about $5.78 billion more in taxes.

In 1998, the Joint Committee on Taxation estimated that the five-year cost of raising the deduction from 50% to 100% would be $43.8 billion. And while the economy is in a considerably different condition than ten years ago, it is uncertain how drastically the five-year cost estimate might change.

If you would like to learn more about H.B. 3333, you can visit these web pages:
H.B. 3333: Business Meal and Entertainment Tax Deduction
National Restaurant Association Press Release

With Health Care Expenses on the Rise, What Will Become of Current Tax Deductions?

2009-07-15T14:19:00.000-07:00

Regardless of where you stand on the health care debate currently taking center stage in U.S. political discussions, there is one thing we all can agree on – health care is expensive, very expensive. Whether in the form of health insurance premiums, prescription drug costs or hospital bills, health care expenses can make a substantial impact on any family’s budget.

As consolation, the IRS allows taxpayers to deduct various health care expenditures. However, in order to qualify, taxpayers must have amassed qualifying health care expenditures exceeding 7.5% of their adjusted gross income (AGI), after which all remaining expenditures may be added to their itemized deduction.

Change is on the Horizon?
While health care expenditures are one of the most frequently asked about deductions, rarely do any of our clients qualify. This may all change soon if Representative Clifford Stearns from Florida’s sixth district has anything to say about it.

In January Representative Stearns sponsored H.R. 198, which is designed to allow insurance and prescription drug expenses to be deducted entirely (thus no longer making them subject to 7.5% of the taxpayer’s AGI). H.R. 198 raises some question marks with regard to the treatment of additional medical expenditures, including hospital stays and dental expenses. It often takes the combined affect of health insurance premiums and additional medical expenditures to help a taxpayer utilize the health care expense itemized deduction. With premiums out of the picture, the 7.5% of AGI qualification may need to be adjusted to benefit taxpayers who accumulate a large amount of medical expenses.

It is still uncertain whether the resolution will see the light of day or face rejection like the majority of bills and resolutions referred to committee. Previous versions of this resolution died with the committee during the past five sessions of Congress, and there are no signs that H.R. 198 will break that trend. At the time this post was written, H.R. 198 was still in the hands of the House Committee on Ways and Means.

Flexibility is Needed
Without any significant change to the American health care system, one thing is certain – health care expenditures per capita will continue to rise for years to come. In fact, a recent report from the Urban Institute highlights that consumer health care expenditures may be on a sharp rise in the years to come. Their research indicated that individual and family spending on health care will increase by 45.9% in a best case scenario, and 68% in a worst case scenario.

We are not advocating for or against reform in the American health care system, but we do believe that the IRS code surrounding the health care expenditure deduction will eventually have to address the growing strain placed on taxpayers from rising medical expenses.

Relief for 2009
As described in our recent post “2009 Tax Code Changes Affecting the Unemployed,” the IRS is addressing the costs of COBRA for taxpayers. There have also been significant adjustments to the Health Coverage Tax Credit, which will now pay 80% of the health insurance premiums for taxpayer who lost their jobs due to increased imports or shifts in production outside of the United States. To receive for this credit, taxpayers must qualify for Trade Adjustment Assistance. You can learn more about this program here.

If you would like more information about health care resolutions and tax credits, you can visit these websites:
H.R. 198: Health Care Tax Deduction Act of 2009
Health Coverage Tax Credit

2009 Tax Code Changes Affecting the Unemployed

2009-07-11T07:07:00.000-07:00

We just got back in the office from a long week at the IRS Nationwide TaxForum, and we have a lot to share about 2009 tax code changes. In light of the current economic crisis our country is facing, the IRS has announced changes to the ’09 tax code that may provide some relief to taxpayers who have recently become unemployed. While the level of benefit for these changes may be marginal for some, it is important to gain awareness of the changes sooner rather than later.

Unemployment Compensation

With unemployment nearing 10%, there are millions of American’s who will rely on unemployment checks this year to keep food on their table and a roof over their heads. What some people collecting unemployment don’t realize (and what many often ignore) is that unemployment compensation is considered taxable income. And while they can elect to withhold taxes from their unemployment checks, this is often unrealistic because it places additional financial stress on the taxpayer. As a result, many people collecting unemployment face quite a painful situation the following tax year when they owe taxes on their unemployment compensation.

There will be some relief for unemployed taxpayers in 2009, when the first $2,400 in unemployment compensation will be excluded from their income (and therefore not taxed). This provision will only affect unemployment compensation earned in ’09.

If you only plan to incur $2,400 or less in unemployment compensation this year, you would benefit from not withholding taxes from this income to maximize your available funds.

COBRA Premium Assistance

One of the most difficult decisions facing Americans after losing their jobs is whether to maintain their healthcare benefits by enrolling in COBRA. While COBRA does help prevent individuals from forfeiting their group health coverage benefits, the cost of these benefits often increase substantially without their previous employer’s assistance. As a result, many Americans make the difficult decision to forgo health coverage altogether (especially if their only source of income is unemployment compensation, and if individual health coverage costs exceed those of COBRA).

There is, however, some relief to recently retired and unemployed American’s on COBRA. Qualifying individuals may elect to retain COBRA for as low as 35% of their plan’s monthly premiums, while the remaining 65% will be paid by their former employer (and subsequently credited against the employers employment taxes). This subsidy will last for a period of up to 9 months and is terminated upon the individual’s enrollment in another health plan (employer sponsored or individual). The subsidy is also terminated if the individual elects to receive Medicare.

Who Qualifies?
Individuals Eligible for this credit must meet the following requirements:

Must have elected to receive COBRA coverage. If coverage was initially declined, the individual will get an additional 60 days to elect to receive coverage after they receive notice of the special election period.
Must have had their employment involuntarily terminated
Is eligible for COBRA between September 1, 2008 and December 31, 2009
Earn less than $125,000 ($250,000 for those filing married filing jointly) to obtain full benefit. The subsidy gets phased out if you earn $125,000 - $145,000 ($250,000 - $290,000 for those filing married filing jointly)

If you would like more information about the tax code updates discussed above, you can visit these websites:
Unemployment Compensation Tax Exemption
Employers Tax Guide (see page 8 for COBRA information)
COBRA Premium Assistance Credit

Shedding Light on New Federal Auto Deductions and Credits

2009-06-25T10:08:00.000-07:00

In light of ailing auto sales and an added emphasis on energy efficiency, the federal government has unveiled tax breaks and rebates for people who purchase a new car in 2009 (including an additional break if you think green while doing so). While these credits and deductions do not apply to all taxpayers and consumers, many Americans will likely benefit from the incentives.

Motor Vehicle Sales Tax Deduction

The American Recovery and Reinvestment Act of 2009 includes a state and local sales and excise tax deduction paid on the purchase of new vehicles during 2009. Taxpayers residing in states without a sales or excise tax (Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon) will be able to deduct other fees or taxes imposed by the state or local government, granted that they are assessed on the purchase of the vehicle and are based on the vehicle’s sales price or as a per unit fee.

Who qualifies?
In order to be eligible for the Sales Tax Deduction, you must fit all of the following criteria:

Purchase the right type of vehicle: The vehicles that qualify must be new, and include cars, motorcycles, light trucks and motor homes
Do not exceed the income requirements: If your modified adjusted gross income is less than $125,000 if you file taxes as an individual, or $250,000 if you file jointly, you may qualify for the full tax benefit of this deduction. If your modified adjusted gross income is between $125,000 and $135,000 if you file taxes as an individual, or $250,000 and $260,000 if you file jointly, you may still be able to receive partial benefit of this deduction. If your modified adjusted gross income exceeds $135,000 if you file taxes as an individual, or $260,000 if you file jointly, you will not qualify for the deduction
Purchase during the right time frame: Only vehicles purchased between February 17, 2009 and December 31, 2009 qualify for the deduction

How beneficial is this deduction?
The sales tax deduction can be very beneficial to taxpayers who qualify. The one caveat, however, is that you may only deduct the sales or excise tax imposed on the first $49,500 of a car. Also, it is very important to note that this deduction is available even if you do not itemize deductions, allowing you to get the full tax benefit even if you just take your standard deduction.

Here’s an example: Let’s say you live in Los Angeles, California, and would like to purchase a brand new Acura TL. For this example, we will say it costs $42,235 (I opted for the all wheel drive and navigation). The sales and use tax rate in Los Angeles is 9.25%, so the sales tax on your Acura will cost $3,906.74. If you qualify for this tax deduction, you will be able to reduce your adjusted gross income for the 2009 tax year by $3,906.74 on top of your standard or itemized deduction.

Car Allowance Rebate System (also known as Cash for Clunkers)

The Car Allowance Rebate System (CARS) was recently enacted to provide new car buyers with incentive for “thinking green” when they explore their new car options. New car buyers who choose to trade in their current vehicle to use toward the purchase of a more environmentally friendly alternative may qualify.

Unlike the motor vehicle sales tax deduction, CARS is a tax-free credit provided by the dealer to reduce the purchase price of their new vehicle, as opposed to a deduction that would lower the taxpayer’s adjusted gross income. The credit will vary between $3,500 and $4,500, depending on the trade-in and purchased vehicles.

What Vehicles Qualify?
In order for a vehicle to qualify, the following criteria must be met:

The vehicle must be purchased between July 1, 2009 and November 1, 2009
The trade-in vehicle must be less than 25 years old at the time of trade-in
The vehicle purchased/leased must be new. If the vehicle is leased, the period must be for at least five years
Generally, the trade-in vehicle must get combined city/highway fuel economy of 18 or less MPG (very large pickup trucks and cargo vans have a different requirement). Visit http://www.fueleconomy.gov/feg/sbs.htm to view your vehicles estimated fuel economy
The trade-in vehicle must be registered and insured by the buyer throughout the full year preceding the trade-in date
The suggested retail price of the new vehicle cannot exceed $45,000
The vehicle must be sold by a dealership registered with CARS program. Visit http://www.cars.gov/ for a complete list of participating dealerships as soon as the program is under way

So what’s the catch?
Before you trade in your cherished ’99 Mercedes SL500 for a brand new Toyota Prius, be aware that you are not going to receive the Kelley Blue Book value for your car. Rather, you will receive the scrap value of your car, since the law requires that your trade-in vehicle is destroyed. So if your SL’s trade in value is listed around $14,000, it may be in your best interest to forgo this credit. On the other hand, you may want to consider trading in your ’91 Isuzu Trooper in fair condition with 150,000 miles, since its trade in value will likely settle under $500.

Another thing that is yet to be seen will be how participating dealerships work CARS into their current rebate and discount offerings. While the dealerships are reimbursed by the Fed, it will be interesting to see how participating dealerships advertise the program. There is always the possibility that some dealers will cut back on price bargaining, citing the credit as ample incentive to buy with them. However, it is possible that to become a program participant, dealers may have to adhere to certain criteria governing advertising and sales tactics. This is still unknown, as registration details have yet to be released.

Last, it is important to note that CARS will only benefit the owner of the trade-in vehicle if they have owned, registered and insured the vehicle for more than a year. So you cannot go out and acquire the aforementioned Isuzu next week in an effort to save $4,000 on your Prius purchase. You also cannot transfer the title for your mother’s ’85 Cadillac Eldorado into your name to secure the benefit.

If you would like more information about the new vehicle tax and rebate benefits discussed above, you can visit these websites:
Motor Vehicle Sales Tax Deduction IRS description
Cash for Clunkers consumer website
Car Allowance Rebate System government website

2010 FILING SEASON STATISTICS
Cumulative through the weeks ending 11/06/09 and 11/05/10

Individual Income Tax Returns	2009		2010		% Change
Total Receipts	143,529,000		141,536,000		-1.4%
Total Processed	143,079,000		141,536,000		-1.4%

E-filing Receipts:
TOTAL	95,478,000		98,740,000		3.4%
Tax Professionals	63,285,000		63,893,000		1.0%
Self-prepared	32,193,000		34,847,000		8.2%

Web Usage:
Visits to IRS.gov	275,308,302		281,765,152		2.3%

Total Refunds:
Number	111,163,000		108,923,000		-2.0%
Amount	$315.290	Billion	$326.125	Billion	3.4%
Average refund	$2,836		$2,994		5.6%

Direct Deposit Refunds:
Number	72,982,000		74,460,000		2.0%
Amount	$220.250	Billion	$237.444	Billion	7.8%
Average refund	$3,018		$3,189		5.7%