Sanders and Assoc. Federal Tax Update

Sanders and Associates, P.C.

Certified Public Accountant

455 E. Pikes Peak Avenue, Suite 308

Colorado Springs, Colorado 80903

(719) 477-1246 Fax (719) 477-0034

Tax simplification is a constant buzz phrase in Washington. During the year 2008, your Congress enacted 8 separate bills that impacted the tax code in some way. These voluminous complex laws included the Emergency Economic Stabilization Act of 2008, the Heroes Earning Assistance Act of 2008, the Heartland, Habitat, Harvest and Tax Relief Act of 2008, the Housing Assistance Tax Act of 2008, the Energy Improvement and Extension Act of 2008, the Tax Extenders and AMT Relief Act of 2008, the Fostering Connections to Success and Increasing Adoption Act of 2008, and finally the Worker, Retiree and Employer Recovery Act of 2008. How is that for Congressional tax simplification?

It is now the spring of 2009. New administration, same results. Change – a lot. Tax simplification – no way. Politics as usual - yes. The new regime borrowed the smoke machine and mirrors from the previous administrations and put them to quick use. On February 17, 2009, the president signed into law the “American Recovery and Reinvestment Act of 2009,” (ARRA), the largest tax bill in history. Although overshadowed by the enormous amount of funds in the Act dedicated to the pet pork projects by the congressional folk, there are numerous provisions regarding income taxes included in ARRA including more than 300 tax code changes. Below is a brief outline of some of the tax related provisions.

“Making Work Pay” credit. Remember, smoke and mirrors. This is not a credit, rather it is a reduction in amount of the tax owed by selected taxpayers. There will be no check issued as was done in 2008 with the economic stimulus. This provision basically will reduce the income tax liability by up to $400 per person, up to $800 for joint filers, for the years 2009 and 2010 through lower tax withholding. The IRS produced new withholding tables so less income tax will be withheld on wages and retirement distributions. Taxpayers who do not have any wages or self-employment income, such as retirees and the unemployed, will not receive any benefit from this credit. A single person earning more than $75,000, $150,000 for joint filers, is disqualified from receiving this tax credit. Dependent children are also not eligible. Unfortunately, those earning over these levels and retirees who have federal taxes withheld from their retirement distributions will find that they may not have sufficient taxes withheld since the withholding table amounts have been reduced but these taxpayers will not be eligible for this tax credit, so they need to be ready for the possible sticker shock next April 15^th.

The “Economic Recovery Payment.” As noted above, the “Making Work Pay” benefit will not come in the form of a check. But, as a consolation prize for being older and not eligible for that credit, each recipient of social security, VA benefits, military retirement benefits, and Railroad Retirement benefits wins the lottery and the government is sending them a $250 check in 2009 only. Also, SSI recipients will receive the $250 payment but they must spend it within 9 months otherwise they may jeopardize their future SSI payments. This $250 payment is scheduled to be paid in June 2009. This seems easy enough to understand, but wait, remember this was written by our Washington geniuses. If you collect retirement benefits in any of the above groups and receive your $250 and you are still earning income from wages or self-employment, watch this shell game. Those who are eligible for the Making Work Pay credit of $400, but have received $250 from the Economic Recovery Payment will be eligible for only a Making Work Pay credit of $150, the $400 less the $250. Who said tax policy is fair and equal?

Economic Recovery Payment for other retirees. Retirees receiving a pension from a state or a municipality, but not receiving a pension from any of the organizations identified above are also eligible for the $250 prize but they will have to wait until 2010 to reap the benefit since it will be claimed on the taxpayer’s 2009 federal income tax return. This includes retired police, firefighters, teachers and any other retired state, county or city employee receiving a state, county or city pension. Once again, non-SSI disability retirement recipients are excluded. The same reduction in the Making Work Pay credit described above applies to those qualifying for this prize. Only one $250 per retiree, no double dipping.

Unemployment Compensation exclusion. Finally, a simple logical change. The first $2,400 a taxpayer receives in unemployment benefits is excluded from federal taxable income for 2009 only. No restrictions. Years ago, no unemployment benefits were taxable so this is a step in the right direction.

Tax deduction for sales tax paid on a new vehicle (maybe). ARRA allows a deduction in 2009 for the sales tax paid on the purchase of a “New” automobile, SUV, motorcycle, light truck, or motor home purchased in 2009 after February 16, 2009. But wait, this one is laden with land mines. You cannot claim the deduction if your taxable income exceeds $125,000, $250,000 for joint filers. Only the sales tax paid on the first $49,500 of the purchase price qualifies, although the deduction can be claimed for multiple vehicles up to the $49,500 maximum per-vehicle. You cannot claim this deduction if you use itemized deductions and elect to claim the sales tax paid rather than the state income taxes paid. An increase in itemized deductions by the amount paid for vehicle sales tax was allowed under prior tax rules. Now to claim the sales tax deduction as an itemized deduction, you must claim the state income tax paid and not use the sales tax option. Taxpayers who do not itemize can increase their standard deduction by the allowable sales tax paid. Once again, making a tax change as confusing as is possible.

Expanded First-Time Home Buyers tax credit. You may all remember the first-time homebuyer tax credit that was enacted in 2008. That was not a tax credit, but rather an interest free loan that had to be repaid over 15 years or less. Well, this is 2009 and the rules have changed. This is now a refundable tax credit and the maximum amount has been increased to $8,000 from $7,500. The credit is limited to 10% of the purchase price of the new home, up to the $8,000 maximum, on a new home purchased in the U.S. by November 30, 2009 by a first-time home buyer. The tax credit phases out for taxpayers with income between $75,000 and $95,000, and joint taxpayers with income between $150,000 and $170,000. The 2009 tax credit does not have to be repaid, except when the house is sold or no longer used as a primary residence within 36 months following the purchase date, then the full tax credit claimed must be repaid. There is an exclusion from the repayment if the sale is the result of the taxpayer’s death. A first-time homebuyer is a person who has not owned a primary residence in the 3 year period prior to the purchase date of the new home. In the case of joint return filers, neither of the parties could have owned a home in the prior 3 years. In the case of other joint owner situations, home ownership by one of the new owners does not disqualify the other eligible buyer from the credit.

Alternative Minimum Tax patch. Once again, the legislators chose to put a one year patch on the AMT. They increased the amount of income that is excluded from the AMT calculation to prevent masses of tea bag wielding taxpayers from ascending on Washington and interrupting the legislators three martini lunches. Basically, those who missed out paying AMT in 2008 will likely do so again in 2009. But, it is only a matter of time before Congress forgets the AMT patch some year then all tea bags will break out.

Expanded Earned Income Credit. Making kids count. More is now better. ARRA increases the earned income credit paid to families with 3 or more children for 2009 and 2010, only. In the past, the EIC has been limited to include only 2 children. Under the new rules taxpayers can get up to an additional $629 for that third child, but the qualifying income level is the same as for a 2 child family. The income phase out level has also been increased.

Higher education tax credits. Remember the Hope (as in Hope, Arkansas) tax credit, which was a major tax accomplishment under the Clinton administration? Well Hillary is not president and Bill is not first-man, so this legacy was swept under the proverbial rug. Great, we gave up Hope for Change! The new law renames the credit the “American Opportunity Tax Credit,” but only for the years 2009 and 2010, then it fades into the sunset and Hope returns. It creates a $2,500 a year higher education tax credit for the first 4 years of college, versus the 2 years at $1,800 under the obsolete Hope program and $2,000 for 2 years under the Lifetime Learning Credit. The income limit before the credit is lost has been increased to $80,000 for single filers and to $160,000 for joint filers. 40% of the tax credit is now refundable versus a non-refundable status under the old Hope rules. Also, books and other required materials now count toward the qualified education expenditures, what a unique concept.

Energy Tax Credits. The energy tax credits that were available in 2006 and 2007, but not in 2008, have been reinstated for 2009 and 2010. And, they have been increased. The rate of the tax credit has been increased from 10% of the cost up to 30% of the cost. The former $500 maximum lifetime credit for energy items has been eliminated and a new $1,500 lifetime maximum aggregate cap for expenditures in 2009 and 2010 is now the rule and past tax credits claimed do not count against the new limit. Plus, the income tax credit for installation of solar and geothermal alternative energy improvements has also been increased to 30% of the cost with no cap on the amount and it is now fully refundable for the years 2009 and 2010. But the credit cannot be claimed if the energy improvements are used to heat your pool or hot tub. There is also a tax credit of up to $2,500 for plug-in low-speed vehicles, golf carts excluded.

Miscellaneous. The business deduction for the 50% bonus depreciation was extended through 2010. The $250,000 limit on first year expensing of new business equipment was extended through 2009. Education expenses qualifying for tax free distributions from 529 education savings plans for 2009 and 2010 now include computer technology and equipment and internet access fees. Employees who are laid off after September 1, 2008 but before January 1, 2010 and elect COBRA insurance are required to pay only 35% of their premiums for the first 9 months with the taxpayers subsidizing the remainder.

Now to the Future. Change!! Yes, the pending 2010 $3.5 trillion Obama budget contains even more changes to the tax laws. It remains to be seen which pet tax changes will survive the usual pork barrel politics but a concessionary Congress will likely joyfully adopt many of them. Some of the proposals include: raising the highest individual tax rate from 35% to 39.6% in 2011, raising the capital gains rate from 15% to 20% in 2011, reducing the itemized deductions and exemption amounts, and limiting the charitable contribution deductions for those with higher incomes. Businesses will face higher taxes and more government intervention into their operations. A taxpayer who willfully fails to file tax returns for three out of any five year period would be committing a felony and criminal charges would be imposed with a maximum penalty of $250,000 and/or up to five years in prison under the new aggravated failure-to-file criminal penalty. Severe tax penalties will be imposed on estates that undervalue their assets to reduce or avoid estate taxes. An excise tax on all oil production through the Superfund may be re-imposed and the tax benefits of oil and gas investing may be reduced or eliminated. Landlords will be required to issue a 1099 to any service provider such as a plumber or painter to whom they pay $600 or more in a year AND must verify the payees’ social security number through the IRS. Get ready now that big brother WILL be watching and taxing your every move. Change.

REQUIRED IRS CIRCULAR 230 DISCLOSURE:

To comply with U.S. Treasury Regulations, you are hereby informed that, unless expressly stated otherwise, this communication (including any attachments) is not intended or written to be used, and cannot be used as or considered a “covered opinion” or other written tax advice and cannot be used by any taxpayer to avoid penalties under the Internal Revenue Code; to promote, market or recommend to another party any transaction or tax-related matter(s); or for IRS audit, tax dispute, or other purposes.

CONSUMER ASSISTANCE TO RECYCLE AND SAVE (“CARS”) ACT OF 2009

PROPERLY KNOW AS

“CASH FOR CLUNKERS”

The Cash for Clunkers Act has been passed by congress and blessed by the president. Under the Act, individuals and businesses who trade in certain vehicles on the purchase of new vehicles can receive a cash incentive. The basic premise is to trade in gas-hogging older vehicles on a new more fuel efficient vehicle. The cash incentive to be paid by the federal government (thank you Mr. or Mrs. Taxpayer) is either $3,500 or $4,500 depending on the type of vehicle traded in and the fuel efficiency of the new vehicle purchased. As with any government hand-out there are many, many complexities to discourage participation.

Here are the rules:

1. This is NOT a rebate program. The owner of the vehicle does not receive any cash payment for his/her old vehicle. The voucher payment is made directly to the “participating” new car dealership selling you the new vehicle and you receive the voucher amount as a credit toward the purchase price.

2. The voucher amount represents the total value of the vehicle being traded in. The dealer voucher is not in addition to a trade in value, so the MAXIMUM trade in allowance for an “Eligible Trade-in Vehicle” is either the $3,500 or $4,500 described below, nothing else. So, the trade-in value is zero.

3. The purchased vehicle MUST be new, not used, and the purchase MUST be made between July 1, 2009 and November 1, 2009, although the rebates stop earlier if the $950 million fund is exhausted.

4. Leased vehicles also qualify for the dealer voucher as long as the lease period is at least five (5) years.

5. A single person is eligible for only one dealer trade-in voucher and joint registered owners are eligible for only one dealer voucher per single trade-in vehicle. Multiple voucher purchases are not allowed.

6. The new vehicle must have a manufacturer’s suggested retail price of $45,000 or less.

7. Trade-in vehicle. The requirements to meet the “Eligible Trade-in Vehicle” standard is that as of the trade-in date the vehicle: (A) is in “drivable condition”; (B) has been continuously registered to AND insured by the person trading it in for at least one (1) year prior to the trade-in (documents MUST be provided to participating new car dealer); (C) was manufactured not more than twenty five (25) years prior to the trade-in date and no later than the 2001 model year; and (D) in the case of a passenger automobile, achieve a Combined Fuel Economy , “CFE”, of eighteen (18) miles per gallon or less.

8. New vehicle. For a new vehicle to qualify, the “Combined Fuel Economy” of the new passenger vehicle must be AT LEAST twenty two (22) miles per gallon; the CFE of a Category 1 truck must be at least eighteen (18) miles per gallon; and the CFE of a Category 2 truck must be at least fifteen (15) miles per gallon.

9. Dealer Voucher Amounts for “Passenger Cars.” For passenger automobiles, excluding SUVs and minivans, the dealer voucher amount is $3,500 if the CFE of new fuel efficient passenger vehicle is at least four (4) miles per gallon HIGHER than the CFE of the “Eligible Trade-In vehicle. The dealer voucher amount increases to $4,500 if the CFE of the new passenger vehicle is ten (10) miles per gallon higher than the CFE of the eligible trade-in vehicle.

10. Dealer Voucher Amounts for “Category 1 trucks.” Category 1 trucks are non-passenger autos that have a CFE of at least 18 miles per gallon, INCLUDING SUVs and minivans. The dealer voucher amount is $3,500 if the new vehicle is a “Category 1” truck and the CFE of the new fuel efficient truck is at least two (2) miles per gallon higher than the CFE of the eligible trade-in vehicle. The dealer voucher increases to $4,500 if the vehicle is a Category 1 truck and the new fuel efficient Category 1 truck has a CFE at least five (5) miles per gallon higher than the CFE of the eligible trade-in vehicle.

11. Dealer Voucher Amounts for “Category 2 trucks.” Category 2 trucks include a large van or large pickup as categorized by the Treasury Secretary. The dealer voucher amount is $3,500 if the new truck is a “Category 2” truck and the CFE of the new fuel efficient truck is at least fifteen (15) miles per gallon and the eligible trade-in vehicle is a Category 2 truck and CFE of the new Category 2 truck is at least one (1) mile per gallon higher than the CFE of the eligible trade-in truck. The dealer voucher increases to $4,500 if the new fuel efficient truck is a Category 2 truck that has a CFE of at least fifteen (15) miles per gallon and the CFE of the new Category 2 truck is at least two (2) miles per gallon higher than the CFE of the eligible trade-in truck.

12. Dealer Voucher Amount for “Category 3 trucks.” Category 3 trucks are those as defined in the IRS code. These are large work trucks. The dealer voucher amount is $3,500 if the new truck is a “Category 2” truck of model year 1985 to 2000, or the new fuel efficient truck is a Category 3 truck and the eligible trade-in vehicle is also an eligible Category 3 truck of model years 1985 to 2000 and is of similar size or larger than the new fuel efficient Category 3 truck as determined in a manner prescribed by the Treasury Secretary. There is no $4,500 dealer voucher available for the trade-in of a Category 3 truck.

13. The dealer voucher is in addition to any rebate or discount offered by the dealer or the manufacturer.

14. To receive the dealer voucher from Uncle Sam, the participating dealer receiving the trade-in vehicle must agree to scrap the vehicle, except for salvaged parts excluding the engine and drive train.

15. The fuel economy of the purchaser’s existing vehicle and new vehicle are determined from the U.S. Department of Energy website www.fueleconomy.gov.

16. There is no recapture of the voucher amount if the purchaser of the new vehicle is immediately disposes of the new vehicle.

17. The dealer voucher is not treated as taxable income to the purchaser.

18. More information on the program is available at the government website www.cars.gov.

REQUIRED IRS CIRCULAR 230 DISCLOSURE: