Considering the current economic conditions, most of us are turning to our retirement funds for financial needs. However, we need to be aware of the tax consequences that may follow with such distributions.
Since the contributions to these plans are made from our before tax dollars (I have excluded Roth contributions/plans from the discussion here), the distributions when taken out will be fully taxable. In addition,the law imposes a 10% additional tax on early distributions from a qualified retirement plan or deferred annuity contract before reaching age 59 1/2. Whereas you cannot get out of the resulting tax liability, you may be able to save the early withdrawal penalty.
There are certain exceptions to 10% early withdrawal penalty.
The following six exceptions apply to distributions from any qualified retirement plan:
1. Distributions made to your beneficiary or estate on or after your death.
2. Distributions made if you are are totally and permanently disabled.
3. Distributions made as part of a series of substantially equal periodic payments over the life expectancy of the owner or life expectancies of the owner and the beneficiary. If these distributions are from a qualified plan other than an IRA, you must separate from service with this employer before the payments begin for this exception to apply.
4. Distributions that are equal to or less than your deductible medical expenses, that is, the amount of your medical expenses that is more than 7.5% of your adjusted gross income.
5. Distributions made due to an IRS levy of the plan.
6. Distributions to qualified reservists.
The following additional exceptions apply only to distributions from a qualified retirement plan other than an IRA:
1. Distributions made to you after you separated from service with your employer (State or local government), if the separation occurred in or after the year you reached age 55 or distributions from qualified governmental defined benefit plans if you were a qualified public safety employee who separated from service on or after you reached age 50,
2. Distributions made to an alternate payee under a qualified domestic relations order(QDRO), and
3. Distributions of dividends from employee stock ownership plans.
Showing posts with label Tax. Show all posts
Showing posts with label Tax. Show all posts
Friday, August 6, 2010
Thursday, July 2, 2009
Monetization of the First Time Home Buyer Credit
The American Recovery and Reinvestment Act of 2009 offers homebuyers a tax credit of up to $8,000 for purchasing their first home.
In May 2009 FHA ruled that state Housing Finance Agencies and certain non-profits can "monetize" up to the full amount of the tax credit (depending on the amount of the mortgage). This means that the lenders will purchase the tax credit from the home buyer in advance and so the home buyer can immediately apply the funds toward their down payments and closing/other upfront costs.
Currently, borrowers applying for an FHA-insured mortgage are required to make a minimum 3.5 percent down payment on the purchase of their home.
With this ruling the Home buyers using FHA-approved lenders can apply the tax credit to their down payment in excess of 3.5 percent of appraised value or their closing costs, which can help achieve a lower interest rate. But they cannot monetize tax credit to meet the required 3.5 percent minimum down payment.
Some of the things one should be aware of before using this credit-
1. The credit can be only used for some upfront cost or down payment in excess of 3.5%. The tax credit can only be monetized and used towards these costs. It will not be refunded to you as cash back.
2. Note that the monetization of the tax credit will be through short-term bridge loans secured against the repayment of the first time homebuyer tax credit and hence there will be a cost associated with such loan so consumers have to be aware of potential abuse and be cautious in selecting the mortgage institution.
3. These programs will place a second lien on the house as collateral to secure the repayment of the loan in most cases.
In May 2009 FHA ruled that state Housing Finance Agencies and certain non-profits can "monetize" up to the full amount of the tax credit (depending on the amount of the mortgage). This means that the lenders will purchase the tax credit from the home buyer in advance and so the home buyer can immediately apply the funds toward their down payments and closing/other upfront costs.
Currently, borrowers applying for an FHA-insured mortgage are required to make a minimum 3.5 percent down payment on the purchase of their home.
With this ruling the Home buyers using FHA-approved lenders can apply the tax credit to their down payment in excess of 3.5 percent of appraised value or their closing costs, which can help achieve a lower interest rate. But they cannot monetize tax credit to meet the required 3.5 percent minimum down payment.
Some of the things one should be aware of before using this credit-
1. The credit can be only used for some upfront cost or down payment in excess of 3.5%. The tax credit can only be monetized and used towards these costs. It will not be refunded to you as cash back.
2. Note that the monetization of the tax credit will be through short-term bridge loans secured against the repayment of the first time homebuyer tax credit and hence there will be a cost associated with such loan so consumers have to be aware of potential abuse and be cautious in selecting the mortgage institution.
3. These programs will place a second lien on the house as collateral to secure the repayment of the loan in most cases.
Tuesday, January 6, 2009
Gift Tax 2009
Normally a person can give up to the annual exclusion amount $13000 for 2009 to a person, every year ($ 26000 in 2009 if spouses joins in for the gift) without facing any gift taxes and note that such amounts do not count as part of your $1,000,000 lifetime total.
Further, IRS allows a person to give up to $1,000,000 in gifts, total, in their lifetime, before they start owing the gift tax. (This gift is not per (donee)person but its a per donor limit). So you can make gifts that are worth up to a $1,000,000 during your lifetime without paying the gift tax. . Even if you do not owe a gift tax because you have not reached the $1,000,000 limit, you are still required to file gift tax return if you made a gift that does not qualify as excludable.
Further, IRS allows a person to give up to $1,000,000 in gifts, total, in their lifetime, before they start owing the gift tax. (This gift is not per (donee)person but its a per donor limit). So you can make gifts that are worth up to a $1,000,000 during your lifetime without paying the gift tax. . Even if you do not owe a gift tax because you have not reached the $1,000,000 limit, you are still required to file gift tax return if you made a gift that does not qualify as excludable.
Florida Corporate Income Tax Estimated Tax Due Dates Are One Day Earlier After January 1, 2009.
Effective January 1, 2009, regardless of the tax year, the due dates for declarations of estimated tax and the due dates for payments of estimated tax will be one day earlier than previously required. This change will require declarations and payments of estimated tax to be made on or before the last day of the 4th month, the last day of the 6th month, the last day of the 9th month, and the last day of the tax year. This earlier payment due date must be taken into consideration when making electronic payments, which must be initiated before the due date.
TIP #08C01-08 (FLDOR)
TIP #08C01-08 (FLDOR)
Monday, December 29, 2008
Year End Charitable Contribution
IRS Offers Tips for Year-End Donations via IR-2008-138.
Individuals and businesses making contributions to charity should keep in mind several important tax law provisions that have taken effect in recent years.
Special Charitable Contributions for Certain IRA Owners-
An IRA owner, age 70 ½ or over, can directly transfer tax-free up to $100,000 per year to an eligible charitable organization. This option, created in 2006 and recently extended through 2009, is available to eligible IRA owners, regardless of whether they itemize their deductions. Distributions from employer-sponsored retirement plans, including SIMPLE IRAs and simplified employee pension (SEP) plans, are not eligible.
To qualify, the funds must be contributed directly by the IRA trustee to the eligible charity. Amounts so transferred are not taxable and no deduction is available for the amount given to the charity.
Not all charities are eligible. For example, donor-advised funds and supporting organizations are not eligible recipients.
Transferred amounts are counted in determining whether the owner has met the IRA’s required minimum distribution rules.
.
Rules for Clothing and Household Items-
To be deductible, clothing and household items donated to charity must be in good used condition or better. A clothing or household item for which a taxpayer claims a deduction of over $500 does not have to be in good used condition or better if the taxpayer includes a qualified appraisal of the item with the return. Household items include furniture, furnishings, electronics, appliances, and linens.
Guidelines for Monetary Donations-
To deduct any charitable donation of money, regardless of amount, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. Bank records include canceled checks, bank or credit union statements, and credit card statements. Bank or credit union statements should show the name of the charity, the date, and the amount paid. Credit card statements should show the name of the charity, the date, and the transaction posting date.
For payroll deductions, the taxpayer should retain a pay stub, a Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.
Also, a taxpayer obtain an acknowledgment from a charity for each deductible donation (either money or property) of $250 or more.
Contributions are deductible in the year made. Thus, donations charged to a credit card before the end of the year count for 2008. This is true even if the credit card bill isn’t paid until next year. Also, checks count for 2008 as long as they are mailed this year.
Check that the organization is qualified to receive a deduction.
For all donations of property, including clothing and household items, get from the charity, if possible, a receipt that includes the name of the charity, date of the contribution, and a reasonably-detailed description of the donated property. If a donation is left at a charity’s unattended drop site, keep a written record of the donation that includes this information, as well as the fair market value of the property at the time of the donation and the method used to determine that value.Additional rules apply for a contribution of $250 or more.
The deduction for a motor vehicle, boat or airplane donated to charity is usually limited to the gross proceeds from its sale. This rule applies if the claimed value of the vehicle is more than $500. Form 1098-C, or a similar statement, must be provided to the donor by the organization and attached to the donor’s tax return.
If the amount of a taxpayer’s deduction for all noncash contributions is over $500, a properly-completed Form 8283 must be submitted with the tax return.
Source-IRS website.
Individuals and businesses making contributions to charity should keep in mind several important tax law provisions that have taken effect in recent years.
Special Charitable Contributions for Certain IRA Owners-
An IRA owner, age 70 ½ or over, can directly transfer tax-free up to $100,000 per year to an eligible charitable organization. This option, created in 2006 and recently extended through 2009, is available to eligible IRA owners, regardless of whether they itemize their deductions. Distributions from employer-sponsored retirement plans, including SIMPLE IRAs and simplified employee pension (SEP) plans, are not eligible.
To qualify, the funds must be contributed directly by the IRA trustee to the eligible charity. Amounts so transferred are not taxable and no deduction is available for the amount given to the charity.
Not all charities are eligible. For example, donor-advised funds and supporting organizations are not eligible recipients.
Transferred amounts are counted in determining whether the owner has met the IRA’s required minimum distribution rules.
.
Rules for Clothing and Household Items-
To be deductible, clothing and household items donated to charity must be in good used condition or better. A clothing or household item for which a taxpayer claims a deduction of over $500 does not have to be in good used condition or better if the taxpayer includes a qualified appraisal of the item with the return. Household items include furniture, furnishings, electronics, appliances, and linens.
Guidelines for Monetary Donations-
To deduct any charitable donation of money, regardless of amount, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. Bank records include canceled checks, bank or credit union statements, and credit card statements. Bank or credit union statements should show the name of the charity, the date, and the amount paid. Credit card statements should show the name of the charity, the date, and the transaction posting date.
For payroll deductions, the taxpayer should retain a pay stub, a Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.
Also, a taxpayer obtain an acknowledgment from a charity for each deductible donation (either money or property) of $250 or more.
Contributions are deductible in the year made. Thus, donations charged to a credit card before the end of the year count for 2008. This is true even if the credit card bill isn’t paid until next year. Also, checks count for 2008 as long as they are mailed this year.
Check that the organization is qualified to receive a deduction.
For all donations of property, including clothing and household items, get from the charity, if possible, a receipt that includes the name of the charity, date of the contribution, and a reasonably-detailed description of the donated property. If a donation is left at a charity’s unattended drop site, keep a written record of the donation that includes this information, as well as the fair market value of the property at the time of the donation and the method used to determine that value.Additional rules apply for a contribution of $250 or more.
The deduction for a motor vehicle, boat or airplane donated to charity is usually limited to the gross proceeds from its sale. This rule applies if the claimed value of the vehicle is more than $500. Form 1098-C, or a similar statement, must be provided to the donor by the organization and attached to the donor’s tax return.
If the amount of a taxpayer’s deduction for all noncash contributions is over $500, a properly-completed Form 8283 must be submitted with the tax return.
Source-IRS website.
Thursday, August 28, 2008
IRS Disaster Relief - Tropical Storm Fay Victims
Due to severe storms and flooding on Aug. 18, the federal government has declared Brevard, Hendry, Okeechobee, St. Lucie and Volusia counties in Florida as presidential disaster areas that qualify for Individual Assistance.
As a result, the IRS is postponing until Nov. 17 certain deadlines for taxpayers who reside or have a business in the disaster area. The postponement applies to return filing, tax payment and certain other time-sensitive acts otherwise due between Aug. 18, 2008 and Nov. 17, 2008.
In addition, the IRS will waive the failure to deposit penalties for employment and excise deposits due on or after Aug. 18 and on or before Sept. 2, as long as the deposits were made by Sept. 2.
As a result, the IRS is postponing until Nov. 17 certain deadlines for taxpayers who reside or have a business in the disaster area. The postponement applies to return filing, tax payment and certain other time-sensitive acts otherwise due between Aug. 18, 2008 and Nov. 17, 2008.
In addition, the IRS will waive the failure to deposit penalties for employment and excise deposits due on or after Aug. 18 and on or before Sept. 2, as long as the deposits were made by Sept. 2.
Monday, August 25, 2008
Mortgage Interest Credit
The mortgage interest credit is intended to help lower-income individuals afford home ownership. If you qualify, you can claim the credit each year for part of the home mortgage interest you pay.
You may be eligible for the credit if you were issued a mortgage credit certificate (MCC) from your state or local government. Generally, an MCC is issued only in connection with a new mortgage for the purchase of your main home.
The MCC will show the certificate credit rate you will use to figure your credit. It also will show the certified indebtedness amount. Only the interest on that amount qualifies for the credit.
How to claim the credit. To claim the credit, complete Form 8396 and attach it to your Form 1040. Include the credit in your total for Form 1040, line 54; be sure to check box a on that line.
Reducing your home mortgage interest deduction. If you itemize your deductions on Schedule A (Form 1040), you must reduce your home mortgage interest deduction by the amount of the mortgage interest credit shown on Form 8396, line 3. You must do this even if part of that amount is to be carried forward to 2008.
Selling your home. If you purchase a home after 1990 using an MCC, and you sell that home within 9 years, you may have to recapture (repay) all or part of the benefit you received from the MCC program.
Limit based on credit rate. If the certificate credit rate is higher than 20%, the credit you are allowed cannot be more than $2,000.
Limit based on tax. Your credit (after applying the limit based on the credit rate) generally cannot be more than your regular tax liability on Form 1040, line 44, plus any alternative minimum tax on Form 1040, line 45, minus certain other credits. Use Form 8396 to figure this limit.
Carryforward. If your allowable credit is reduced because of the limit based on your tax, you can carry forward the unused portion of the credit to the next 3 years or until used, whichever comes first.
Refinancing. If you refinance your original mortgage loan on which you had been given an MCC, you must get a new MCC to be able to claim the credit on the new loan. The amount of credit you can claim on the new loan may change.
An issuer may reissue an MCC after you refinance your mortgage. If you did not get a new MCC, you may want to contact the state or local housing finance agency that issued your original MCC for information about whether you can get a reissued MCC.
You may be eligible for the credit if you were issued a mortgage credit certificate (MCC) from your state or local government. Generally, an MCC is issued only in connection with a new mortgage for the purchase of your main home.
The MCC will show the certificate credit rate you will use to figure your credit. It also will show the certified indebtedness amount. Only the interest on that amount qualifies for the credit.
How to claim the credit. To claim the credit, complete Form 8396 and attach it to your Form 1040. Include the credit in your total for Form 1040, line 54; be sure to check box a on that line.
Reducing your home mortgage interest deduction. If you itemize your deductions on Schedule A (Form 1040), you must reduce your home mortgage interest deduction by the amount of the mortgage interest credit shown on Form 8396, line 3. You must do this even if part of that amount is to be carried forward to 2008.
Selling your home. If you purchase a home after 1990 using an MCC, and you sell that home within 9 years, you may have to recapture (repay) all or part of the benefit you received from the MCC program.
Limit based on credit rate. If the certificate credit rate is higher than 20%, the credit you are allowed cannot be more than $2,000.
Limit based on tax. Your credit (after applying the limit based on the credit rate) generally cannot be more than your regular tax liability on Form 1040, line 44, plus any alternative minimum tax on Form 1040, line 45, minus certain other credits. Use Form 8396 to figure this limit.
Carryforward. If your allowable credit is reduced because of the limit based on your tax, you can carry forward the unused portion of the credit to the next 3 years or until used, whichever comes first.
Refinancing. If you refinance your original mortgage loan on which you had been given an MCC, you must get a new MCC to be able to claim the credit on the new loan. The amount of credit you can claim on the new loan may change.
An issuer may reissue an MCC after you refinance your mortgage. If you did not get a new MCC, you may want to contact the state or local housing finance agency that issued your original MCC for information about whether you can get a reissued MCC.
Thursday, August 21, 2008
Refinancing & Mortgage Interest deduction
With interest rate being low and everyone trying to refinance the mortgage and cash out – you may want to find out if your mortgage interest deduction on your tax return will be affected.
IRC 163 defines qualified mortgage interest (interest you can deduct if you itemize on Schedule A) as interest paid or accrued during the taxable year on
1. Acquisition indebtedness, which is a loan used to acquire, build, or substantially improve a residence. Interest on up to $1,000,000 such acquisition indebtedness is deductible for taxpayers who itemize their deductions.
2. Home equity indebtedness which is any kind of borrowing against your residence that is not used to acquire, build, or substantially improve that particular residence. It includes the typical "home equity line of credit," as well as the cash-out from a refinance that is not used to substantially improve the home(but may be used to pay your credit card debt, car loan and so on). Interest on up to $100,000 of home equity indebtedness is deductible.
Note that a taxpayer who is subject to the AMT is not allowed the deduction of interest on home equity indebtedness that is not used to acquire, build, or substantially improve the residence.
Revenue Ruling 2005-11 provides an interesting analysis on this issue and every person refinancing and subject to AMT must understand this.
IRC 163 defines qualified mortgage interest (interest you can deduct if you itemize on Schedule A) as interest paid or accrued during the taxable year on
1. Acquisition indebtedness, which is a loan used to acquire, build, or substantially improve a residence. Interest on up to $1,000,000 such acquisition indebtedness is deductible for taxpayers who itemize their deductions.
2. Home equity indebtedness which is any kind of borrowing against your residence that is not used to acquire, build, or substantially improve that particular residence. It includes the typical "home equity line of credit," as well as the cash-out from a refinance that is not used to substantially improve the home(but may be used to pay your credit card debt, car loan and so on). Interest on up to $100,000 of home equity indebtedness is deductible.
Note that a taxpayer who is subject to the AMT is not allowed the deduction of interest on home equity indebtedness that is not used to acquire, build, or substantially improve the residence.
Revenue Ruling 2005-11 provides an interesting analysis on this issue and every person refinancing and subject to AMT must understand this.
Tuesday, August 12, 2008
Globalization - Often asked TAX Question !!
With growing globalization, US Citizens and Permanent resident aliens have been working outside the country more than ever. They often have a misconception that since they are working outside the country, they do not have US Source income so they do not need to file and pay taxes. However, this is not true. I have addressed this issue several times. Here it goes again....
If you are a U.S. citizen or a resident alien of the United States and you live abroad, you are subject to tax on your worldwide income. However, you may qualify to exclude from income up to $87.600 for 2008 ($85,700 for 2007) of your foreign earnings. In addition, you can exclude or deduct certain foreign housing amounts.
You may also be entitled to exclude from income the value of meals and lodging provided to you by your employer.
To claim the foreign earned income exclusion, the foreign housing exclusion, or the foreign housing deduction, you must have foreign earned income, your tax home must be in a foreign country, and you must be one of the following:
1. A U.S. citizen who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year
2. A U.S. resident alien who is a citizen or national of a country with which the United States has an income tax treaty in effect and who is a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, or
3. A U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months
The foreign earned income exclusion and the foreign housing cost amount exclusion are figured on Form 2555 (PDF), which must be attached to Form 1040 (PDF). However, if you claim only the foreign earned income exclusion, you may be able to use Form 2555-EZ (PDF) instead.
In case where you do not qualify for the exclusion discussed above, you will be able to claim foreign tax credit. Which means that, to some extent, you will be able to offset your tax liability in US with the foreign taxes you paid on that income to a foreign country. You will have to fill Form 1116 for this purpose and attach to Form 1040.
Tuesday, August 5, 2008
American Housing Rescue and Foreclosure Prevention Act of 2008
H.R. 3221, the “American Housing Rescue and Foreclosure Prevention Act of 2008,” was signed into law by the President on July 30, 2008 to support the failing housing market ad help the troubled homeowners. It also aims at tightening lending practices and reform financial institutions associated with that market.
It includes the “Housing Assistance Tax Act of 2008 which provides for important tax law changes that will impact individuals and small businesses.
Some of the highlights are-
Tax credit for First-Time Homebuyers
First time homebuyers purchasing a qualified home after Apr. 8, 2008 and before July 1, 2009, are eligible for a refundable tax credit equal to the lesser of 10% of the purchase price of a principal residence or $7,500 ($3,750 for married individuals filing separately). Though it is a tax credit, it is more like an interest free loan. The credit that is availed by the taxpayers will need to be repaid in equal annual installments over 15 years.
Additional standard deduction available for property taxes
Taxpayers who claim the standard deduction instead of itemizing deductions are allowed to claim an additional standard deduction for state and local property taxes paid in 2008. Note that this deduction is available for 2008 only. As with all the deductions/credits, the deduction cannot exceed the lesser of state and local property taxes actually paid or $500 ($1,000 for joint filers). Considering that the property appraisals are at all time high, I wonder if this would do any good…
Information Reporting of Merchants' Credit Card and Third-Party Network Sales starting 2011.
In the year 2011, the gross amount of credit and debit card payments(gross annual revenue) a merchant receives during the year, along with the merchant's name, address, and taxpayer identification number (TIN) will be required to be reported to the IRS. This has been enacted to nail down the merchants who fail to correctly report income. It, of course, has exceptions for some small businesses with receipts under $20,000 a year. It is believed this will raise over $9.8 billion over ten-years.
Primary residence capital gains exclusion prorated
Capital gain exclusion of $250,000 ($500,000 for married filing joint) that was available on gain from sale of home will now be pro-rated based on the percentage of time the house was used as primary residence in the 5 year period. So if you used the property as rental for 2 years and as your primary residence for 3 years and than you sold the property for a gain of $200,000 than your exclusion under sec 121 will be 60% of $200,000 which is $120,000 since you used your property as primary residence for 60% of the time in the 5 year period. In addition, depreciation recapture rules will apply too. This provision will become effective for sale of residence after December 31, 2008 and will be based only on the non qualified use period that begin on or after January 1, 2009.
Interest Earned on Exempt Facility, Qualified Residential Rental, and Veterans' Mortgage Bonds Isn't an AMT Preference
The Act provides that for bonds issued after July 30, 2008, tax-exempt interest earned on the following instruments is not a preference item for AMT purposes-
(1) exempt facility bonds -95% or more of the net proceeds of which are used to provide qualified residential rental projects (2) qualified mortgage bonds and (3) qualified veterans' mortgage bonds.
Detailed breifing of the Act can be found at
http://tax.cchgroup.com/legislation/2008-Housing-Assistance-Act.pdf
It includes the “Housing Assistance Tax Act of 2008 which provides for important tax law changes that will impact individuals and small businesses.
Some of the highlights are-
Tax credit for First-Time Homebuyers
First time homebuyers purchasing a qualified home after Apr. 8, 2008 and before July 1, 2009, are eligible for a refundable tax credit equal to the lesser of 10% of the purchase price of a principal residence or $7,500 ($3,750 for married individuals filing separately). Though it is a tax credit, it is more like an interest free loan. The credit that is availed by the taxpayers will need to be repaid in equal annual installments over 15 years.
Additional standard deduction available for property taxes
Taxpayers who claim the standard deduction instead of itemizing deductions are allowed to claim an additional standard deduction for state and local property taxes paid in 2008. Note that this deduction is available for 2008 only. As with all the deductions/credits, the deduction cannot exceed the lesser of state and local property taxes actually paid or $500 ($1,000 for joint filers). Considering that the property appraisals are at all time high, I wonder if this would do any good…
Information Reporting of Merchants' Credit Card and Third-Party Network Sales starting 2011.
In the year 2011, the gross amount of credit and debit card payments(gross annual revenue) a merchant receives during the year, along with the merchant's name, address, and taxpayer identification number (TIN) will be required to be reported to the IRS. This has been enacted to nail down the merchants who fail to correctly report income. It, of course, has exceptions for some small businesses with receipts under $20,000 a year. It is believed this will raise over $9.8 billion over ten-years.
Primary residence capital gains exclusion prorated
Capital gain exclusion of $250,000 ($500,000 for married filing joint) that was available on gain from sale of home will now be pro-rated based on the percentage of time the house was used as primary residence in the 5 year period. So if you used the property as rental for 2 years and as your primary residence for 3 years and than you sold the property for a gain of $200,000 than your exclusion under sec 121 will be 60% of $200,000 which is $120,000 since you used your property as primary residence for 60% of the time in the 5 year period. In addition, depreciation recapture rules will apply too. This provision will become effective for sale of residence after December 31, 2008 and will be based only on the non qualified use period that begin on or after January 1, 2009.
Interest Earned on Exempt Facility, Qualified Residential Rental, and Veterans' Mortgage Bonds Isn't an AMT Preference
The Act provides that for bonds issued after July 30, 2008, tax-exempt interest earned on the following instruments is not a preference item for AMT purposes-
(1) exempt facility bonds -95% or more of the net proceeds of which are used to provide qualified residential rental projects (2) qualified mortgage bonds and (3) qualified veterans' mortgage bonds.
Detailed breifing of the Act can be found at
http://tax.cchgroup.com/legislation/2008-Housing-Assistance-Act.pdf
Monday, August 4, 2008
NEW GUIDANCE ON ACCOUNTABLE PLANS
If you are an employer who provides allowances or reimburses employees for travel expenses, you should be aware of new published guidance regarding the requirements of accountable plans.
In Revenue Ruling 2006-56, the IRS analyzed a plan for reimbursing employees for travel and determined that it does not properly track excess payments exhibits a pattern of abuse and therefore fails to qualify as an accountable plan, and is subject to all payments to employees under the plan are subject to employment taxes.
Under IRC sections 62(a)(2) and 62(c), reimbursements for travel (including amounts allowable under established per diem rates) that meet established tests for an accountable plan, are not subject to employment taxes (federal income tax withholding, social security and Medicare).
The following are the three requirements for an accountable plan:
1. There must be a business connection and the expense must be reasonable.
2. There must be reasonable accounting for the expenses.
3. All excess reimbursements must be repaid in a reasonable time.
For Test #2, amounts paid up to the allowable federal per diem rates for meals, expenses for incidental expenses and lodging are deemed substantiated, without the usual requirements for keeping records of the expenses with receipts.
The Regulations provide that, in addition to these three tests, the plan cannot exhibit a “pattern of abuse.” Regulation 1.62-2(k) states that:
If a payer’s reimbursement or other expense allowance arrangement evidences a pattern of abuse of the rules of section 62(c) and this section, all payments made under the arrangement will be treated as made under a nonaccountable plan.
In the case addressed in the revenue ruling, the employer reimbursed truck drivers for meals and incidental expenses incurred on days when they were traveling away from home. The number of travel days was estimated, and paid at a special annually-published daily rate allowable for the transportation industry. Advances were paid based on the expected number of days in out-of-town travel each month. However, it was determined that the system provided no way to track whether the drivers were actually out-of-town on all the days indicated. It was determined that the employer routinely failed to track the excess allowances and to treat them as wages. Therefore, even though the tests for business connection, substantiation, and repayment were met, the plan fails to meet the requirements of an accountable plan.
As a result of the determination that this was not an accountable plan, all reimbursements (not just the amounts in excess of the allowable per diem) were determined to be wages subject to employment tax withholding. The failure to implement and use a mechanism or process to track the excess allowances and to treat any excess allowances as wages subject to employment tax evidences a pattern of abuse under the regulations.
An employer who reimburses employees for travel expenses should be aware of the accountable plan rules and tracking requirements, and understand that amounts paid under nonaccountable plans will be deemed to be wages, includible on Form W-2 and subject to income tax withholding, social security and Medicare taxes. In this case the employer would be liable for penalties and interest on taxes assessed for prior periods. If the anti-abuse requirements are not met, an otherwise accountable plan may be deemed nonaccountable and all reimbursements could be deemed wages subject to tax.
source- http://www.irs.gov/
In Revenue Ruling 2006-56, the IRS analyzed a plan for reimbursing employees for travel and determined that it does not properly track excess payments exhibits a pattern of abuse and therefore fails to qualify as an accountable plan, and is subject to all payments to employees under the plan are subject to employment taxes.
Under IRC sections 62(a)(2) and 62(c), reimbursements for travel (including amounts allowable under established per diem rates) that meet established tests for an accountable plan, are not subject to employment taxes (federal income tax withholding, social security and Medicare).
The following are the three requirements for an accountable plan:
1. There must be a business connection and the expense must be reasonable.
2. There must be reasonable accounting for the expenses.
3. All excess reimbursements must be repaid in a reasonable time.
For Test #2, amounts paid up to the allowable federal per diem rates for meals, expenses for incidental expenses and lodging are deemed substantiated, without the usual requirements for keeping records of the expenses with receipts.
The Regulations provide that, in addition to these three tests, the plan cannot exhibit a “pattern of abuse.” Regulation 1.62-2(k) states that:
If a payer’s reimbursement or other expense allowance arrangement evidences a pattern of abuse of the rules of section 62(c) and this section, all payments made under the arrangement will be treated as made under a nonaccountable plan.
In the case addressed in the revenue ruling, the employer reimbursed truck drivers for meals and incidental expenses incurred on days when they were traveling away from home. The number of travel days was estimated, and paid at a special annually-published daily rate allowable for the transportation industry. Advances were paid based on the expected number of days in out-of-town travel each month. However, it was determined that the system provided no way to track whether the drivers were actually out-of-town on all the days indicated. It was determined that the employer routinely failed to track the excess allowances and to treat them as wages. Therefore, even though the tests for business connection, substantiation, and repayment were met, the plan fails to meet the requirements of an accountable plan.
As a result of the determination that this was not an accountable plan, all reimbursements (not just the amounts in excess of the allowable per diem) were determined to be wages subject to employment tax withholding. The failure to implement and use a mechanism or process to track the excess allowances and to treat any excess allowances as wages subject to employment tax evidences a pattern of abuse under the regulations.
An employer who reimburses employees for travel expenses should be aware of the accountable plan rules and tracking requirements, and understand that amounts paid under nonaccountable plans will be deemed to be wages, includible on Form W-2 and subject to income tax withholding, social security and Medicare taxes. In this case the employer would be liable for penalties and interest on taxes assessed for prior periods. If the anti-abuse requirements are not met, an otherwise accountable plan may be deemed nonaccountable and all reimbursements could be deemed wages subject to tax.
source- http://www.irs.gov/
Thursday, July 31, 2008
The Mortgage Forgiveness Debt Relief Act of 2007 to the rescue...
The Mortgage Forgiveness Debt Relief Act of 2007 was signed by President Bush on December 20, 2007.
Mortgage Debt Forgiveness:
Normally a forgiven debt is counted as income for the taxpayer. However Mortgage Relief Act of 2007 allowed taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualified for this relief.
Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion doesn’t apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.
The amount excluded reduces the taxpayer’s cost basis in the home
The new law applies to debt forgiven in 2007, 2008 or 2009. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, may qualify for this relief. In most cases, eligible homeowners only need to fill out a few lines on Form 982 (specifically, lines 1e, 2 and 10b).
The debt must have been used to buy, build or substantially improve the taxpayer's principal residence and must have been secured by that residence. Debt used to refinance qualifying debt is also eligible for the exclusion, but only up to the amount of the old mortgage principal, just before the refinancing.
Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the new tax-relief provision. In some cases, however, other kinds of tax relief, based on insolvency, for example, may be available
Mortgage Insurance Premiums:
Taxpayer can deduct mortgage insurance premiums as “home mortgage” interest on premiums paid after December 31, 2006 and before January 1, 2011.
Tuesday, July 29, 2008
Much Awaited Stimulus Check!
Most of you must have received the stimulus rebate. For those who did'nt..
You can check the status of the stimulus rebate(on IRS website) at the link
You can check the status of the stimulus rebate(on IRS website) at the link
Where's My Refund?
Still waiting for the IRS tax refund check!
You can check the status of the refund(IRS website) at the link
You can check the status of the refund(IRS website) at the link
Tax Refund Status
Still waiting for the IRS tax refund check!
You can check the status of the refund(IRS website) at the link below-
https://sa1.www4.irs.gov/irfof/lang/en/irfofgetstatus.jsp
You can check the status of the refund(IRS website) at the link below-
https://sa1.www4.irs.gov/irfof/lang/en/irfofgetstatus.jsp
Thursday, July 24, 2008
Minimum Wage Increase
Effective today, July 24, 2008, the federal minimum wage for covered nonexempt employees is $6.55. The federal minimum wage provisions are contained in the Fair Labor Standards Act (FLSA).
Many states have minimum wage laws. In cases where an employee is subject to both state and federal minimum wages laws, the employee is entitled to the higher of the two minimum wages.
Many states have minimum wage laws. In cases where an employee is subject to both state and federal minimum wages laws, the employee is entitled to the higher of the two minimum wages.
Recent Scams to steal identity - Posing as IRS
IRS has cautioned taxpayers to be very careful of scams consisting of e-mails requesting detailed personal information.
IRS generally does not send e-mails to taxpayers, does not discuss tax account matters with taxpayers in e-mails, and does not request security-related personal information, such as PIN numbers, from taxpayers.
Most of these scams involve tax refunds and economic stimulus rebate receipt.
These are all scams to steal to identity......Hence, beware...
IRS generally does not send e-mails to taxpayers, does not discuss tax account matters with taxpayers in e-mails, and does not request security-related personal information, such as PIN numbers, from taxpayers.
Most of these scams involve tax refunds and economic stimulus rebate receipt.
These are all scams to steal to identity......Hence, beware...
Filing Extensions Changing for Some Business Taxpayers Later this Year
IR-2008-084
IRS has announced a change in the extended due date on certain business returns to help individuals better meet their filing obligations. As a result the six month extension for Partnership and trust will change to five month and will be due on September 15th instead of October 15th.
This change will be effective for extension requests with respect to tax returns due on or after Jan. 1, 2009, and applies to business entities that file the following returns and forms that have a tax year ending on or after Sept. 30, 2008:
1. Form 1065, U.S.Return of Partnership Income
2. Form 1041, U.S. Income Tax Return for Estates & Trusts
3. Form 8804, Annual Return for Partnership Withholding Tax (Section 1446)
The regulation does not change the process for requesting an extension of time to file, nor does it affect extensions of time to file other types of business returns, such as those used by S corporations.
Extended Due Date
The due date for Corporation tax returns that filed an extension for 2008 is due September 15th, 2008. For individuals and Partnerships the due date is October 15th, 2008.
Thursday, July 10, 2008
Capital Gain exclusion on Primary residence
As per IRC 121-
When you sell your primary residence, you can make up to $250,000 in profit if you're a single owner, twice that if you're married, and not owe any capital gains taxes if you meet the ownership and use tests. You will generally only need to report the sale of your home if your gain exceeds a certain dollar prescribed by law. You may be entitled to exclude gain from income if during the 5-year period ending on the date of the sale, you must have:
Owned the home for at least 2 years (the ownership test), and
Lived in the home as your main home for at least 2 years (the use test).
During the 2-year period ending on the date of the sale, you did not exclude gain from the sale of another home.
If you owned and lived in the property as your main home for less than 2 years, you may still be able to claim an exclusion in some cases (change in place of employment, health or unforseen circumstances)
When you sell your primary residence, you can make up to $250,000 in profit if you're a single owner, twice that if you're married, and not owe any capital gains taxes if you meet the ownership and use tests. You will generally only need to report the sale of your home if your gain exceeds a certain dollar prescribed by law. You may be entitled to exclude gain from income if during the 5-year period ending on the date of the sale, you must have:
Owned the home for at least 2 years (the ownership test), and
Lived in the home as your main home for at least 2 years (the use test).
During the 2-year period ending on the date of the sale, you did not exclude gain from the sale of another home.
If you owned and lived in the property as your main home for less than 2 years, you may still be able to claim an exclusion in some cases (change in place of employment, health or unforseen circumstances)
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