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
Tuesday, August 5, 2008
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
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