Whoops! New Laws!
Whew! It's Over!
Tax season was extra tough this year. The turmoil in the economy threw us all some curves. I fear there is more in store.
First, I certainly owe you a big THANK YOU! Thanks for the good order of your records. Thanks for being patient at my busiest time. Especially - Thanks for the trust and confidence you placed in me. I'll keep working to earn this from you.
Whoops! New Laws!
Wow! In the past two years we have seen 14 new tax laws. The last time Congress produced such bulk was in 1986 and 1987. And, there's more to come. Just check the news bailouts, recession, unemployment. We can bank on more new laws.
My head is spinning! Tax time was tough. Now I need to grapple with dozens of new rules for 2009. I'll try to explain some changes that impact lots of people. I'm still trying to understand all of the new laws.
For Nearly Everyone.
One or more of three new programs will affect most folks:
1. Making Work Pay Credit.
This one gives a $400 tax cut to most working people. (Working couples get $800.) For last year's "rebate" IRS sent checks. This one will be handled by reduced withholding at work. Most employers started using new withholding tables on April 1.
2. Social Security Recipients got a "one-time" $250 payment in Mayor June. The extra payment went to anyone collecting social security, SSl, railroad retirement, veteran's disability or pensions.
3. $250 Credit To Retired Government Workers will be claimed on the 2009 tax return.
These are Related! It is assumed social security recipients and government retirees don't work. If they do work, the Making Work Pay credit is reduced. Oops! If you collect the credit as reduced withholding at work, you might owe tax when you file your 2009 return!
For most, the credits are nearly automatic. The result will inject over $200 billion into the economy. But, some of you may get a rude surprise when you file in 2010.
Limitations. The payments for social security and the government retiree credits are "one-time" items. The Making Work Pay Credit runs for 2009 and 2010, but has limits.
It's 6.2% of "earned" income, with a cap of $400. It takes $6,451 of W-2 (or self-employment) for the $400 maximum. There's an income limit, too. As total income passes $75,000, the credit phases out. It disappears at $95,000. The limits for a couple are the double of this. Anyone who is claimed as another's dependent may not claim the credit.
Problem Cases. If your withholding at work declined on April 1, you may owe taxes next year if you:
- you work more than one job,
- you also collect social security or a govemment pension,
- you and spouse both work, or
- you collect a significant bonus.
Withholding declined for pensions, too, but there is no credit - whoops!
Apply to you? Call me. T can help decide if you owe taxes.
Sales Tax on New Cars. Buy a new car on or after
February 17, 2009 and deduct the sales taxes. Only 2009 purchases count. There are limits - only the first $49,500 of cost counts, and the deduction phases out as your income ranges from $125,000 to $135,000 ($250K to $260K for a couple). You
get the deduction even if you can't itemize deductions, and you can't lose it to the Alternative Minimum Tax. Not yet clear: Can each spouse buy a car? Can you claim this on two cars to a total of $49,500? We hope IRS issues guidance on these issues before it's too late to help.
New Lost Your Job? When you collect unemployment
you are taxed on the income. For 2009 only, each person escapes tax on the first $2,400 of unemployment insurance collected.
New Homebuyer Credit. Last year we got a "credit" for "first-time" homebuyers. "FirstTime" means you did not own a home in the prior three years. You get 10% of the home's price with a $7,500 "cap". It's really a loan, paid back over 15 years, interest-free. It was for purchases between April 6, 2008 and July 1,2009. Now it's sweeter. The new credit affects any 2009 purchase before December 1. A higher $8,000 applies. Best of all, there's no repayment unless it ceases to be your main home within 3 years. There's still a phase out - credit phases out over a $20,000 range as income reaches $75,000 ($150,000 for couples). There is an election to treat any qualified home as if it were bought December 31, 2008. This gets the money to you earlier.
New Energy Credits Return. The popular energy credits in '06 and '07 helped with common home improvements. They are back: insulation, exterior doors, windows, skylights, insulated roofing material, non-electric furnaces and water heaters. The old 10% credit triples to 30%. The lifetime limit of $500 in credits is repealed. Now it's a
$1,500 limit for 2009 and 2010. Certain central air conditioners work, but check with the builder or retailer to be sure your device meets complex standards for the credits. Bigger credits for solar, wind, and geothermal units are here, too, but few can afford them.
Education Credits Are Juicier. The Hope Credit reduced costs of the first two years of college. For 2009 and 2010 the credit is renamed as the "American Opportunity Tax Credit" and made more liberal. Maximum increases from $1,800 to $2,500, and it now covers 4 years of post-secondary education leading to a certificate or degree. The old credit only counted tuition and fees - now it includes books and course materials. The $2,500 is 100% of the first $2,000, plus 25% of the next $2,000. More folks will collect - income phase out starts at $80,000 (was $50,000), and at $160,000 for couples. Better yet, you get the credit even if you pay Alternative Minimum Tax. A bonus for those with low taxes - up to 40% of the credit can be claimed even if you pay no income tax!
And Lots More! There are many more changes in the most recent laws. I have time and space for only a brief mention:
Section 529 Plans are used to save for a college education. Growth is tax-free if spent on costs of the education. The new law adds buying a computer as a qualified cost, as long as the student uses it.
Child Tax Credit of $1 ,000 for each child under age 17 can be lost if your tax bill is low. New law makes it easier to recover a lost credit.
Earned Income Credit offers refunds to workers families with children. There are 2 levels of credit - one if there is a single child, and more if there are 2 or more children. New law adds a 3rd level for those with 3 or more children. Also, the credit phases out as income rises the income limit is higher for 2009 and 2010.
AMT Patch. "AMT" stands for the Alternative Minimum Tax. It was designed to make wealthier folks pay their "fair share" of taxes, but has begun to affect ordinary citizens. New law gives another one-year "patch" to keep the tax from affecting nearly 23 million returns. It also protects several "personal" tax credits from being erased by the AMT.
Depreciation Issues. Two provisions were extended to 2009. 1) Businesses may elect to expense up to $250,000 of equipment that is normally depreciated. 2) "Bonus" depreciation, which allows writeoff for 50% of the cost of an asset, then depreciation for the balance.
Business Losses can generate a "net operating loss" which can be used to recover taxes paid up to three years in the past. New law allows carrying such losses back to the 4th or 5th prior year.
Investment Losses. Normally, investment losses are not treated as favorably as business losses. A new ruling gives business treatment to certain Ponzi scheme losses, as long as the perpetrators are under criminal indictment.
After Your Tax Return Is Filed - - -
All Done? Not quite. Some returns were extended; some of you still owe money; a few refund checks go astray. And - - - when we're done, IRS begins it's work.
Loose Ends? Some didn't complete the 2008 tax cycle:
Extended Return? Returns are due by October 15.
Payment was due April 15, and carrying charges apply after this. Gather the missing paperwork quickly - a last minute surprise can be expensive!
Refund Late? IRS won't help until 10 weeks after you file. 1-800-829-4477 is for automated help. Or try 1-800-829-1954 - the refund hotline. The IRS website www.irs.gov has a "Where's My Refund?" link.
Find an Error? If you failed to claim an item on your return, we can file an amended return. You and IRS each have the same time frame to question your return. It's 3 years after the filing deadline. If you owe IRS you pay the tax plus some interest. If IRS owes you, the same thing applies - you collect the tax savings plus interest.
Keep Your Return and Records. For now, put your return, records, receipts, and cancelled checks in a safe place. You should keep the returns indefinitely; the records should be kept for 5 years. You might need to dig them out, but chances are slim.
Will You Be Audited? Not likely. What does IRS do after you file? Soon they will match reports from banks, brokers, and employers with tax returns. Most "audits" arise when IRS finds a mismatch. They send a letter - - -
Uh-Oh - an IRS Letter! If you get a letter from IRS, call me. The letter may be confusing. There are several types of notices and each requires a different response. Don't risk making an even bigger mess - I'll be glad to handle it.
When IRS questions anything on your return they call this an "audit". Most people picture an "audit" as a face-to-face meeting with an IRS employee who asks lots of questions. IRS has just released statistics for the fiscal year ending in September 2008. They received about 138 million returns, and "audited" l.39 million of these. That's only 1 % of the total. Of these, less than 23% involved meeting with IRS - the rest were handled by correspondence.
The correspondence "audit" usually arises from the IRS "matching" program. It involves copying your records and verifying the return. Face-to-face audits are more complex. We'll need to meet and discuss the issues. But, please remember, only about l-in-400 of all returns are subjected to this sort of scrutiny.
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