2009 Tax Update 2009 Blank Client Organizer Federal Tax Quick Reference Guide Notable 2009 Tax Law Changes Changes Affecting Individuals First Time Homebuyer Tax Credit. This popular credit, set to expire on November 30, 2009, has been extended to apply to a principal residence purchased before May 1, 2010. The credit also applies to the purchase of a principal residence before July 1, 2010 by any taxpayer who enters a written binding contract before May 1, 2010, to close on the purchase before July 1, 2010. For most of 2009, only first-time home buyers qualified for this credit. As a result of this recent legislation, big changes apply to homes purchased after November 6, 2009. In addition to the $8,000 credit for first-time buyers, there is now a $6,500 credit for longtime homeowners, those who continuously owned a home for at least five of the eight years leading up to the purchase of a new home. The new law also increases how much buyers may earn and still claim the credit. The attached Client Letter provides more detail on the newly extended and liberalized homebuyer tax credit rules. Residential Energy Credit. The tax credit equal to 10% of the cost of energy-saving home improvements is increased to 30% for 2009 and 2010, up to a maximum of $1,500 in the two-year period. The credit applies to biomass fuel stoves, qualifying skylights, windows and outside doors, insulation, and high-efficiency furnaces, water heaters and central air conditioners.  Making Work Pay Credit. This new 2009 tax credit is equal to 6.2% of your earned income, capped at $400 if you are single or $800 if you are married and file a joint return. For single filers, it starts phasing out at $75,000 of adjusted gross income and is reduced to zero at $95,000. The phase-out zone for couples is $150,000 to $190,000. Sales –tax Deduction for New Vehicles. If you purchase a new car, truck, motorcycle or motor home between February 16, 2009 and December 31, 2009, you can deduct the sales tax paid – up to a maximum purchase price of $49,500 per vehicle – either as an itemized deduction or as an addition to the standard deduction. The benefit begins phasing out for married couples with adjusted gross income over $250,000 and singles with AGI over $125,000, and it is completely gone for single filers with AGI of $135,000 or more and joint filers with AGI of at least $260,000. Enhanced Education Credits. In the past, two alternative non-refundable credits were available to individuals who incur post-secondary educational expenses. The Hope credit was only available during the first two years of post-secondary education, and could only be used twice by any one student. The Lifetime Learning credit applies to an unlimited number of years of post-secondary education. 2009 Economic Stimulus legislation has modified the Hope credit and renamed it the American Opportunity Tax credit, and it applies for taxable years beginning in 2009 and 2010. The maximum credit is $2,500 per student per year and is allowed for eligible expenses paid for the first four years of a student’s post-secondary education. The credit begins phasing out for singles with adjusted gross income over $80,000 and married couples with AGI over $160,000. Up to 40% of the modified credit is refundable, up to a maximum refundable amount of $1,000. Preparing for Potential Tax Rate Increases. The Obama administration, in its Fiscal 2010 Budget Revenue Proposals, has indicated its intent to increase the upper two income tax rates to 36% and 39.6%. For 2009 and 2010 the top rates are set at 33% and 35%. Under current law, capital gains and qualified dividends are taxed at a 15% top rate, with a 0% lower tier rate. The administration has proposed extending beyond 2010 the 0% and 15% capital gains rates for taxpayers with income up to $250,000 for joint filers and $200,000 for single. However, the administration would allow the present capital gains rates to expire in 2010 for these upper-income taxpayers resulting in a 20% maximum capital gains rate effective in 2011 for those exceeding the above thresholds. Now is the time to consider whether it makes economical sense to accelerate income or gains into 2009 and 2010 or to defer capital losses into 2011 or beyond. While these proposed increases are only hypothetical at the time, the general consensus of experts across the board is that tax rates in 2011 and beyond will not be lower than they are now.  Converting to a Roth IRA. For 2009 and prior, taxpayers may convert a pre-tax retirement plan to a Roth IRA only if the taxpayers’ modified Adjusted Gross Income does not exceed $100,000. For tax years beginning after 2009, the $100,000 modified AGI limit on converting IRAs and qualified retirement plans to Roth IRA status is eliminated. The income resulting from a conversion to Roth status in the year 2010 can be reported equally in each subsequent two tax years, 2011 and 2012. The attached Client Letter explains the opportunities and planning challenges to consider when determining if a conversion to a Roth IRA is right for you.   Changes Affecting Businesses Expanded Section 179 Expensing Allowance Extended. The American Recovery and Reinvestment Tax Act of 2009 extended the increased Section 179 annual dollar limitation and increased asset phaseout threshold for tax years beginning in 2009. The amounts remain at the 2008 levels of $250,000 and $800,000 respectively. If not extended again, the Section 179 limit for tax years beginning in 2010 would revert to the 2007 limit of $125,000, indexed for inflation. Extension of 50% Bonus Depreciation. The American Recovery and Reinvestment Tax Act of 2009 again allows taxpayers to deduct 50% of the cost of new “Qualified Property” purchased in 2009 for use in the taxpayers trade or business. Increased Net Operating Loss Provisions. The Worker, Homeownership, and Business Assistance Act of 2009, which was signed into law on November 6, 2009, makes it easier for most businesses to get immediate tax savings from net operating losses (NOLs). It does so by allowing certain NOLs to be carried back to earlier, more profitable years. The Act provides an election for most taxpayers to carry an applicable NOL back to the 3rd, 4th, or 5th preceding tax year instead of just to the 2nd preceding year as allowed under previous law. Passthrough Penalties Increased. The base amount on which a penalty is computed for failure to file either a partnership or S corporation return for a tax year beginning after December 31, 2009 is increased to $195 per partner or shareholder per month of late filing. Scheduled Drop in FUTA Tax Rate Deferred. The FUTA rate was scheduled to drop from 6.2% to 6% after 2009. Under recent legislation, the 6.2% FUTA tax rate continues to apply through June of 2011, and afterwards a 6% rate will apply. Lower Rates on Related Party Loans. Taxpayers with related party or intra-family installment sales or loans should consider rewriting those debt instruments in order to lock in today’s historically low Applicable Federal Rates.  Please contact our office with any questions.